Paul's Web Blog

Archive for May, 2010

I recently visited a popular online forum with information on loan modifications. Many of the people posting messages have adjustable subprime mortgages and are now desperately seeking solutions to their increased payments. The titles of the posts include, “I am Scared” “What a Mess I Got Myself Into” and “What an Expensive Lesson I Just Learned – Never Again.” As I read the posts, I thought of how the passengers on the Titanic must have felt as the boat that “could not sink” began to tilt downward into the cold water.

The great help the lenders claim to be offering the troubled borrower does not appear to be what the borrower is actually getting. When borrowers attempt to modify their loans they are met with resistance from poorly informed “loan modification departments.” While help from the government seems promising, three weeks have gone by since President Bush announced steps at the Federal level to help homeowners avoid foreclosure. The Federal Government has instituted plans to help an estimated 60,000 delinquent – though credit-worthy borrowers. These borrowers will be able refinance into FHA insured loans. This aid will be available to people who were steered into high cost loans with teasers rates. This may be great help for 60,000 people, but what about the other two million borrowers whose monthly payments are about to rise over the next eighteen months? Our Federal Government’s response leaves them out in the cold.

Using another analogy, I am reminded of the response to the Hurricane Katrina disaster. Slow and inadequate is how the government responds. What we need to see is a “financial triage department” in every lender’s office. In the immediate chaos of Katrina, nobody knew what was going on. Now, many months later, policies are still being written and rewritten. The situation is similar with mortgage crisis. Federal Chairman Ben Bernanke cut the interest rate a half a point which some thought would cause all the mortgage investors to change their loan modification policies. However, more and more lenders are filing bankruptcy, and the ones that are staying in business are laying off employees by the thousands. Many lenders are also becoming defendants in lawsuits brought by their investors.

If you have found yourself facing a mortgage payment you cannot afford, and are contemplating asking your lender for a loan modification, you must know the economic reality. Lenders and their investors are only concerned with profitability. That is, they base their decisions solely on monetary return. They want to see that modifying the loan will be more profitable than foreclosing on the subject property. The lenders want to know you can make the modified monthly payment without fail.

Because the majority of borrowers who are faced with unaffordable payments are victims of teaser rates becoming expired, the modified payment will be higher than the teaser rate. This means that if the borrower could barely afford the teaser payment, there is little chance of paying a higher amount, no matter how small the increase. For borrowers with the ability to slash their living expenses, do without an extra automobile or cell phone, and come up with extra money for the mortgage payment, the lender may be willing to accept less than the full increase in payment. The borrowers with the ability to pay close to what the lender requires are the ones most likely to get a loan modification.

All economic indicators project that for many subprime borrowers with adjustable rate mortgages, default will eventually occur. Capitalistic wisdom should dictate that financial institutions will cut their losses now and not want to be taken down in the spiral as real estate values plummet over the months to come. The lenders knew that the subprime loans were made to high risk borrowers, but they took the risk. Now that they are faced with defaults on their investments, they may be willing to lose some profit to avoid further loss.

For those who are pursuing a negotiation for loan modification with their lender, here are my suggestions:

1. LEARN YOUR LENDER POLICIES

Become knowledgeable and familiar with your lender’s loan modification policies. For rate modifications, know if the lender will accept an application before the rate becomes adjustable or increases. Some lenders require a borrower to be delinquent for at least three months before they even accept an application for loan modification. Lenders often have different policies for borrowers who can no longer pay due to job loss or health issues.

2. GET YOUR LENDERS LOAN MODIFICATION PACKAGE BEFORE YOU START NEGOTIATING

Before calling and giving all your information, ask for a written loan modification package from your lender. If they are willing to send you an application, you will see what information they need and what their policies are. You will then have time to reflect on your answers and not be pressured into answering over the telephone. Additionally, when lenders have their own unique forms, any applications which are not submitted on those forms will fall to the bottom of the pile and face delay in processing.

3. KEEP YOUR COOL

Keep in mind that you are dealing with a department staffed with people who are swamped with calls from irate borrowers, each with the same sad story. These employees become callous to the plights of the borrowers. Furthermore, their employer, the lender, changes the policies and procedures almost daily. In addition, the employees are worried that they will lose their jobs when the lender makes additional job cuts. They may be calling their own mortgage company’s loan modification department next week. You are stressed, and so is the person on the other end of the telephone.

4. DOCUMENT EVERY COMMUNICATION MADE

Keep a log of every telephone call or letter made, and every telephone call or letter received. Include emails and faxes in your log. Make certain that your log contains dates, times, names, and titles. This information may be necessary to document what has been promised by the lender.

5. CREATE AN ACCURATE AND DETAILED EXPENSE REPORT

Lenders base their decisions on your monthly budget which includes your income and expenses. They are not interested in your hardship story, only in learning whether the hardship is over. They are interested in knowing exactly how you are going to make your monthly payments. They want to see a sensible, realistic, and reasonable monthly budget. For example:

a. If you are applying for a rate modification, your lender will want to see that you have a negative residual income. This shows that you cannot afford a rate increase. You will also need to that you have discharged all possible expenses that are considered “excess” or “luxury living.” You must provide evidence that you have done all you can to lower your monthly expenses. They do not want to see expenses for multiple cell phones, premium cable television, designer clothes, or extravagant dining and entertainment expenses. They want to see that your car payment matches a frugal lifestyle, meaning you do not drive a new Hummer.

b. A string applicant will have a monthly budget with a residual income about 25% greater than the monthly mortgage payment. This means that if your mortgage payment is $2,000 per month, you have an income of $2,500. These numbers must be verified by your bank statement or other documentation.

c. If you lose your source of income due to unemployment or medical reasons, the lender will want to know whether such loss is permanent or temporary. If temporary, the lender will need to be assured that your income will return in the near future. A permanent loss of income will result in denial of your loan modification.

6. HAVE A GOOD FAITH DEPOSIT

I saved this point for last, because most borrowers do not understand its importance, and I want to make sure that it gets attention. Imagine being the lender and a borrower who has missed several months of payments calls you. That borrower tells you that he has not been able to make any payments because the adjustable rate kicked in and the payment was too high. This borrower filled out all the application forms and has begged for a loan modification. The borrower has explained that he can pay a certain amount, but not the whole amount. You immediately think to yourself, “Well then, why has this borrower not made any payment at all?” More to the point, you wonder what this borrower has done with the money he would have used to make the mortgage payments had the rate not increased. Can you see the problem here? This borrower better have the mortgage payments in his savings account and be ready to tender that amount to the lender as a good faith deposit. Failure to do so will likely result in a denial of the loan modification.

In summary, lenders will modify loans only if the borrower can convince them that it is in the lender’s best financial interest to do so. That is what they want to see. They want to be assured that, no matter what, you want to keep your home and will do everything you can to make your payments.

Mortgage loans are forever difficult to pay off especially during these tough financial times. The pressure of facing foreclosure can be so intense that some bread winners just choose to take their own lives. However, if you already have a noose tied around your neck you had better cut it off and do your research about mortgage principal reduction. A lot of banks are implementing this and you too can benefit if you are battling with a mortgage.

When you apply for a reduction of your principal a bank actually works towards reducing the amount of money you owe in terms of a mortgage. Banks achieve this in a variety of ways that are quite simple to understand. They can lower the balance on your mortgage to at least 100% of the value of the loan plus they can also carry out principal forgiveness.

Principal forgiveness is whereby the lending institution actually sets aside a part of your principal and reduces the interest on it. The benchmark is for them to carry out principal forgiveness of up to 30%. But not everyone can have their debt reduced in this way without them having to do something on their part. By and large you can only qualify for this if you have been making consistent payments to the lender for an uninterrupted period of five years.

A lot of people who are set to try this out hardly know what documents to attach to their applications. Over and above you will need: a letter of Hardship, pay slips, mortgage paperwork, utility bills, insurance policies or anything you think will impact positively on your application.

The really wonderful thing about mortgage loan modification is that it does not impact negatively on a credit score. The only time your credit score is affected by this is when you apply for modification after you had defaulted on your loan repayments. But when you have always been on time there is no way modification is going to adversely affect your credit score.

Everyone I have ever spoken with claims to have the desire to be in control of their money. Most of these people will admit that they don’t feel like they have very much control over where their money is spent and a surprisingly large number tell that their money is in control of them. The people who feel like their money is out of control are not the same people who don’t know how to stop spending when they are out of cash, or when their checking account is perpetually overdrawn.

If your money is controlling your life, you may have the feeling that you get up in the morning and go to work for the sole purpose of bringing home a paycheck and signing it over to the mortgage holder, the auto finance company, the utility providers, your eldest child’s college tuition office, your youngest child’s youth activity director and every door-to-door child pitchman selling school fundraising items.

How can you tell when your money is out of control? You fell as though it is simply getting up and leaving your wallet whenever it darn well feels like it. So what are you to do about your money and controlling where it goes?

1. Know where you stand

Anytime you are going to go change anything in your life, you have to know what it is that needs changing. This is the same whether you are talking about your finances or your weight.

What you need is a snapshot of where your finances are right now. The only way to do this is to create a Net Worth Index.

There is only one way you can create a Net Worth Index – and that is honestly. Drop the kids off with your in-laws, sit down with your spouse and start writing everything down on paper. You can use a computer spreadsheet if you want to.

Start by listing everything you have that can be sold, and how much you could reasonably expect to get for it. Do not claim your 19th Century rocking chair from Grandma Hopscotch is worth $500 if someone who isn’t sentimentally attached would only pay $100.

While you and your spouse are taking inventory, remember to include watches, diamond earrings, boats, vacation time-shares, stocks inherited from Uncle John and your retirement accounts. List everything and its’ sale value. When you do things like Certificates of Deposit and IRA’s where there is substantial penalty for early withdrawal use the face value. For our purposes we’ll figure you won’t be taking the money out until it has matured.

Now that you have inventoried everything of value and totaled up what it is worth, do the same for your debts. Add in loans from family, friends, banks, businesses, and mortgage companies, past due accounts with the Gas Company and all credit card balances. This is not the time to “forget” someone you owe.

Subtract how much you owe from how much you own. This number is your Net Worth and should be a positive one, though it could be kind of tiny. You won’t need to use this number again until next year when you calculate your Net Worth Index again.

If your Net Worth Index reveals a negative number you are definitely doing something right by working to bring your money under control. What you’ll have to do is follow these four steps, and if necessary taking drastic measures such as a second job, selling valuables, or even selling your current house and moving into a smaller, less expensive dwelling.

2. Develop Your Goals

After you know where you stand financially, you need to decide where you want to go. This involves setting some reachable targets or goals.

Goal setting is not very complicated and in this instance, we are referring to the overall target of gaining control of your money. To do this requires a few measurable small goals, sort of like baby steps.

Your first baby step is to create a plan to pay off your debts. Look at your list of debts again and find which one is the smallest. This is the one you want to pay off first. Pay your minimums on all the others, and then pay everything you can extra a month on the smallest debt.

When it is paid off, take all the money you had paid on the smallest and add it to what you are paying on the second smallest. Keep doing this until you are out of debts to pay off. It doesn’t matter if your debt is for a house or for your soda pop at the corner gas station Following this plan you have created to pay them off is your first baby step.

The second baby step will be the creation of an Emergency Savings Account. This account needs some money added each month until you have accumulated enough money to equal six months of your income. The money you set aside here will help you avoid debt when you have to make a surprise car repair or meet the deductible for your child’s appendix operation.

Your third baby step will be found in the next paragraph, under the heading of Spend with a Plan.

3. Spend with a Plan

Now that you know you are serious about controlling where your money goes, and you are seriously doing something about your debt it is time to make a plan. A spending plan is comparable to a budget in the same way an imported pickup compares to an F-150. When you use a spending plan to guide your finances, you know critical work is getting done.

You need to know what your take home, or net, pay is. Start with your gross monthly salary and deduct all taxes and Social Security contributions. Next you should subtract how much you tithe or contribute in charitable giving each month.

The amount you have left is your Spendable Income. The next thing to pay for is your house expenses and your grocery bill – include only the food you buy in a grocery store to prepare yourself, no eating out or fast food here.

The very next thing to subtract is your debt payment. Once this is taken out, you are left with the money you can spend on everything else you require to live on for the month – also known as your Disposable Income. Write down everythingwhat all you spend money on and see just how much it costs you.

Since it wouldn’t do any good to be working at paying off your debts if you are adding to them every month, you had better find a way to cut your spending down below your Disposable Income or else you will never have control of your money.

Working with your spouse you can decide how to buy store brand things for a fraction of the cost, do without the monthly beauty saloon treatments, cancel club memberships and eat at home instead of dining out 3 nights a week. Perhaps you could even take your lunch to work instead of eating in the cafeteria every day.

The key is to find fun ways to decrease your spending amounts. Involve the children and find small ways to reward them for their practical money saving ideas, after all, they are part of the family and can help too.

Once your spending is under control and kept below the level of Disposable Income available, start to enjoy life. While you are probably not quite as materialistic as the Jones’, you can enjoy a great quality of life than they do as they run controlled by their money.

4. Clean Up Your Clutter

I’ve found that after setting debt repayment as a goal, wrangling the spending into line and in general improving my life by gaining control of my money there is too much stuff in my life. Not activities, but material things.

This is a good time for you to have a garage sale and clean out your closets, the attic and wherever you have hidden all that stuff over the years. The money you raise could be applied towards your smallest debt to speed along its repayment.

Another thing you can do is look for larger things in your life you can dispose of that will help you reach your goal sooner. Do you have a vacation home you haven’t taken a vacation to for several years? What about that second or third car – can you sell it, pay off the loan against it and use cash to outright buy a good used car?

You might think it will hurt to make large changes like this, and it might. Once you have taken the step though, you will feel an easing of the burden on your shoulders.

These four things are just the tip of the iceberg when it comes to controlling money. This short over view is enough for you to get started thinking about ways to begin taking control of your money, but it doesn’t begin to be a step by step guide. Those kinds of guides are out there, but they are too thick to include here.

Using this as a quick start guide to controlling your money will get you pointed in the proper direction. As you progress you’ll find dozens of ways to write your Spending Plan, a hundred more goals to set, and plenty of ideas on how to cut costs. When you are debt-free and telling your money what to do, instead of following it around, you’ll be a happier person.

Purchasing the correct amount of Life Insurance can sometimes be a difficult decision. There are three variables that you must take into consideration. How much do you want? How much do you need? How much can you afford? Usually, the answers to all three questions are different.

Personally, I would love to leave my beneficiaries a million dollar Life Insurance policy, but realistically, I may not be able to afford it right now. So, the question you have to ask yourself is somewhere between, how much do I need, and how much can I afford?

For the purposes of this article, I am going to use the example of a family of four; two parents, with two young children. Most young families carry a debt load that consists of a mortgage, car payment, line of credit, maybe some credit card debt, and usually at least one student loan payment. Let’s say the mortgage is $200,000, the balance on the car is $20,000, maybe $2,000 on the line of credit, $2,000 on the credit card, and an outstanding balance of $16,000 on the student loan(s). This adds up to $240,000 in total debt. If your death happened prematurely, you probably like most others, would not want to leave your spouse the burden of paying off this debt. Therefore, you probably should consider a minimum of $250,000 in some Term Life Insurance.

Have you ever given any thought to a readjustment fund? Let’s say, either you or your spouse died prematurely. What is the likelihood of the remaining spouse being able to immediately return to work? Probably not that good. There are big adjustments that would have to be made. If one of you had been a stay at home parent, who would now look after the children? How easy would it be to help the kids adjust to the loss of a parent, if the remaining parent had to go right back to work? What if you both were killed? Who would to raise your children and who could afford to absorb that cost? These are some very important questions that need answers. A lot of these questions are beyond the scope of this article. This discussion will only focus on your financial concerns.

Let’s say you earn $40,000 per year, and your spouse, $30,000. So, if you died, would five years of readjustment be sufficient for your spouse? Hard to say. Every individual deals very differently with death. Let’s use a five year readjustment period as an example. Multiplied by the annual income of the deceased spouse, another $200,000 of Life Insurance coverage would be required. This is in addition to the $250,000 required to take care of any outstanding debts.

The best and least expensive way to address the liquidity requirements is with affordable Term Life Insurance coverage. As an example, if each parent were 35 years old, they could each be covered for $500,000, for a total cost of less than $50 per month. That’s less than you spend on a cup of coffee and a muffin a day. Wouldn’t you give that up easily to have the comfort of knowing your family is financially secure?

I am constantly amazed when I speak with people and they tell me they are still waiting for tax refund checks after six or twelve months. If you are in this position, you may be in for a surprise.

Still Waiting For Your Tax Refund?

Preparing and filing taxes is one of those things almost nobody likes to do. Much like spring cleaning, it is something to be done and then forgotten about. If you are due a tax refund, however, this can result in some problems. This is particularly true with the IRS.

Every year, the Internal Revenue Service reports that it cannot get refund checks to a large number of taxpayers. No, it does not try to hide this fact. It actually will publish news releases and contact media outlets to get the world out. This year, the IRS is trying to find almost 100,000 people that it has refund checks for. The total dollar figure for outstanding refunds is over $92 million dollars. That is almost a grand per person the IRS cannot find.

Why can’t the IRS find you? Well, there can be a variety of reasons. The most common is you have moved since filing your tax return, but did not tell the IRS. As a result, the IRS sent the refund check to your old address. Another situation that can arise occurs when a marriage happens and the IRS is not notified of any new address or name change. Contrary to what you may have heard, the IRS does not keep tabs on you every day. If you move, you have to let the agency know.

If you are still waiting for a tax refund check, you should get proactive. You can go to the IRS web site and use the “Where is my Refund?” link on the home page to find out the status of your refund. You can also pick up the phone and call the agency at 800-829-1954.

Listen, we all hate preparing and filing our taxes. If you have suffered through the process and generated a refund, don’t lose it. Take action and contact the IRS to get your money today.

All around us, people are getting rich off real estate, buying at just the right time and reselling at higher values or by using tenant rent money to pay off an existing mortgage. Are investment properties a good idea? Or is the market in a downward spiral?

As with anything, there’s no one-size-fits-all solution, but getting information is the first step to assessing whether or not investment properties will be included in your supplemental retirement plan.

Pros of owning investment properties are obvious. Hypothetically speaking, imagine owning a six-plex in a slow-changing, yet prosperous part of Atlanta where you charged each tenant $1,000. Your monthly mortgage for the building might be $3,000 but you’ll still have that extra $3,000 cushion each month.

Another benefit of property investments is the generous tax kickback you may receive. If you delight in getting your lump sum tax return at the end of the year, then perhaps investing and selling properties when you need that quick chunk of cash is right for you.

Also, there’s no penalty for opting out early or age regulations regarding when you can start using your earnings. You don’t have to be rich or super business savvy to add property ownership into your retirement planning agenda. It’s been dubbed “the equal opportunity wealth builder.”

Cons of investment properties include the no guarantee risk. It’s also not a feasible option for everyone because of high transaction prices. Not everyone has thousands of dollars saved to make a substantial down payment.

Vacancies, bad tenants, maintenance costs and property oversupply are a few of the disadvantages. Like any investment, there are many factors beyond your control that could affect your income. For better guarantees, 401ks or IRAs should be included in your financial retirement planning.

Your success in real estate investment properties will depend largely on when and where you buy. Money Magazine reported the most growth in Panama City, Florida and Washington state — cities like Olympia, Spokane and Mount Vernon.

Slow-changing but profitable markets exist in Atlanta, Providence and Albuquerque. First time investors will want to avoid ex-boomtowns like Los Angeles, Santa Barbara and Las Vegas, where exorbitantly high prices make the market unsustainable.

While downtown real estate can be profitable, it’s not advised for people who are simply retirement planning for some supplemental income.

Since the average American moves every five to six years, and twelve million houses are sold each year, why not capitalize on this trend when retirement planning? It doesn’t necessarily take a rich person to invest and profit.

If you’re looking to downsize your home after your family moves out and earn some extra spending money, investment properties may be the right supplemental retirement plan for you!