Raising Taxes Will Cripple An Already Fragile Economy

As I'm sure you are painfully aware, the economy is in serious trouble. Lately the stock market is in constant turmoil with more daily volatility than we've ever seen. The bond market, which drives interest rates, is going through the same type of daily turmoil. House values are still in the twilight zone and government bailouts aren't having quite the effect they were supposed to. At least in the timeframe they were supposed to. Unemployment is on the rise. Blah, blah, blah...

So why would anyone want to raise taxes in an already fragile environment? When are people going to understand that higher taxes stifle growth? In a higher tax environment, obviously many of us will pay higher taxes. But we will also pay more for the goods and services we use on a daily basis because businesses will not absorb the higher taxes they have to pay. They will simply pass the higher taxes on to their customers, us, via higher prices. A double-whammy we just can' afford.

Here is a quote that sums it up nicely. "Given current economic conditions, if Americans elect a presidential candidate who will raise taxes instead of lower them, the economy probably will not rebound by spring 2009 as it otherwise would, Steve Forbes, editor-in-chief of Forbes magazine said. Click here http://www.cnsnews.com/public/content/article.aspx?RsrcID=38138 to view the article.

So who is talking about raising taxes? No one, right? Both candidates are claiming to cut taxes. But who is telling the truth and who is omitting the truth? If you take a few minutes to read an article posted on American Thinker at http://www.americanthinker.com/2008/10/senator_obamas_four_tax_increa.html, you'll surely find out. It is a worthwhile read and I highly encourage you to take the time.

Just in case you don't have the time to read the article I will gladly summarize. On January 1, 2011 the Bush tax cuts of 2001 and 2003 are set to lapse and thus return to the level they were in 2000 if they are not renewed or made permanent. Whether you are a Bush supporter or not, you have benefited from them whether you believe it or not. The media tells you that only the rich benefited so I am providing you a link so you can see if you benefited or not. Go to http://www.moneychimp.com/features/tax_brackets.htm and input your income for any tax year you wish and then compare that to the tax you would have paid in the year 2000, which is what the tax rates will return to if they are allowed to lapse.

Senator McCain, like him or not, vows to make the Bush tax cuts permanent and even lower taxes further. Lower taxes spur economic growth. Companies can expand, which will require them to higher more people. Americans get to keep more of the money they earn, which can then be used to buy the things they want or need and, ultimately, stimulates the economy.

Senator Obama, on the other hand, vows to let the Bush tax cuts lapse, thus rasing taxes. In the American Thinker article Ned Barnett says, "Senator Obama claims that letting a tax cut lapse - allowing the rates to return to a higher level - is not actually a "tax increase." It's just a lapsing of a tax cut.

Do you see the difference?

Neither do I!"

Senator Obama gets around the raising taxes issue because technically he did not raise the taxes. The cuts simply lapsed because he chose not to renew them. He claims that 95% of Americans will get a tax cut under his plan but fails to mention that up to 40% of Americans don't pay income taxes. How do you cut taxes for someone who doesn't pay taxes? You give them money anyway, which, simply put, is WELFARE.

The bottom line is that we cannot afford a tax increase even if it is a passive increase. Obviously, there are other issues to consider and it is not my intent to turn this into a political debate. I simply want to shed some light on a very important issue facing us all as we go forward.

How Taxes Work

Here is an oldie but a goodie that I thought would be appropriate to share again because it is a VERY simple way to understand how taxes work.

Suppose that every day, ten men go out for dinner together. The bill for all ten men comes to $100. If they pay their bill the way we pay our taxes, it would go something like this.

The first four men, the poorest, would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh would pay $7, the eighth would pay $12, the ninth would pay $18, and the tenth man, the richest, would pay $59. That's what they decide to do.

The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement until one day, the owner threw the men a curve ball. In tax lingo it's called a tax cut. "Since you are all such good customers," the owner said, "I'm going to reduce the cost of your daily meal by $20." So now dinner for the ten men costs only $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six men, the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fair share?"

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill the way we pay our taxes and he proceeded to work out the amounts each should pay.

It was determined that the fifth man would pay nothing, the sixth man would pitch in $2, the seventh would pay $5, the eighth would pay $9, the ninth would pay $12, leaving the tenth man with a bill of $52 instead of his earlier $59.

Each of the six men were better off than before and the first four men continued to eat for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. "But he, pointing to the tenth man, got $7." "Yeah, that's right," exclaimed the fifth man, "I only saved a dollar too. It's unfair that he got seven times more than me!"

"That's true!" shouted the seventh man. "Why should he get $7 benefit when I only got $2? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late, something very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. Where would that leave the rest of us?

Unfortunately, most taxing authorities do not seem to grasp this rather straight-forward logic!

The Housing Crisis Revisited

I decided to write this new post to my blog because I am beyond fed up listening to the mainstream media place the blame for the current housing crisis firmly on the shoulders of President Bush. While I concede that he is part of the problem, let me give you a little history lesson.

In 1999 the Clinton Administration began pressuring Fannie Mae to expand mortgage loans among low and moderate income people. Fannie Mae also felt pressure from stock holders to maintain its phenomenal growth. There was an article written in The New York Times in September 1999 about this that states that "Fannie Mae does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make loans to people with less-than-stellar credit ratings." For your viewing pleasure click here to read the article written by The New York Times entitled "Fannie Mae Eases Credit To Aid Mortgage Lending," which details the actions.

The Clinton Administration, just like every administration, simply wanted to expand the homeownership rate in America. But they added a twist. They chose to target low to moderate-income borrowers. The administration wanted to increase homeownership rates for a variety of reasons, not the least of which was to expand the economy. A strong housing market affects every sector of the economy. When people own homes they tend to fix them up so companies like Home Depot, Lowes and Dixieline benefit. When people have equity, like the last bull housing market provided, they tend to remodel so contractors and the like benefit. Those same homeowners like to drive new cars and in many cases cars they could not otherwise afford to own, except through equity lines of credit and cashout refinances. They also enjoy their hobbies such as going to the river and going to the desert as well as family vacations to exotic places. In order to fully enjoy the experience they need toy haulers for their dune buggies, quads, motorcycles, jet skiis, boats, etc...

There are other businesses that benefit as well like the restaurant industry and the retail industry. I am the first to admit that when times were "roaring" along I was eating out quite a bit with the family. I was also indulging myself with a big screen TV, vacation place in Cabo, and slew of other goodies I didn't really need. But I digress.

The action encouraged by the Clinton Administration extended mortgages to individuals whose incomes, credit ratings and savings were not good enough to qualify for conventional loans. They go on to say that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. The proposed goal was that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers.

I'm not entirely convinced that this should be a goal. We shouldn't be focusing on increasing homeownership rates among any particular class. It seems to me we should be focusing on making loans to those that qualify and have good credit. If that excludes a few people from the homeownership pool then so be it. If an aspiring homeowners' credit rating prevents them from buying a home right now, then they have something to work toward. If they cannot afford to buy a home due to income then they have something to work toward.

The article goes on to warn that "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a governement rescue similar to that of the savings and loan industry in the 1980s."

I am not advocating that this is the Clinton Administration's fault. Only that they opened the door rather wide. Bush played a role in the debacle as well. He was asleep at the wheel, perfectly content to watch homeownership rates rise, without regard for what the consequences of what such loose policy could lead to. Certainly Franklin Raines, Chris Dodd, Barney Frank, et al, have dirty hands as well. There were signs as well as warnings from many high ranking people and they were ignored because times were good. But, as the saying goes, all good things must come to an end.

There are MANY to blame for the housing crisis, not the least of which is the American public. As convenient as it is to blame the government, Wall Street, the lenders, the loan officers, the Realtors, etc... The American public has to shoulder its share of the responsibility as well. People wanted to own a home so much that they took on payments they couldn't afford, even if they could initially, and loans they didn't understand. We wanted to believe that we could borrow $500,000 for only $1,268 per month so much that we didn't ask any questions. I know you've heard the saying "If it sounds too good to be true then it probably is." When and why did we forget that? Just sharing a few thoughts.

So The Government Takes Over Fannie and Freddie – Why Should I Care?

As you’ve no doubt heard by now, on Sunday, the United States Treasury announced that it will take control of Fannie Mae and Freddie Mac. The reason stated for the take over is the government feels they will no longer be able to meet their mission statement, which is to provide liquidity, stability, and affordability to the mortgage and housing markets.

This will benefit both homeowners and aspiring homeowners alike by lowering interest rates. In an earlier article entitled Fed Rate Cuts Don’t Necessarily Mean Lower Mortgage Rates I explained how Fannie Mae and Freddie Mac mortgage bonds affect mortgage rates so I won’t go into that again, but it is important to note that the biggest purchasers of mortgage-backed securities, which drive mortgage rates, are foreign investors. For the last 6 months or so foreign investors have been less interested in buying mortgage bonds due to the current state of our housing market and level of delinquency and foreclosure. When the demand for mortgage bonds goes down, the price of mortgage bonds drops and interest rates rise. Foreign investors are concerned that they won’t get their money back, let alone the interest they are expecting.

In order to restore confidence in mortgage bonds, back in July 2008 Treasury Secretary, Henry Paulson, announced that the Treasury would guarantee all debt repayments of the two mortgage giants. That announcement seemed to make investors feel better and the purchase of mortgage bonds resumed. However, not at the pace the government expected. Foreign investors generally purchase about 65% to 75% of the bonds in an auction and since the first of the year that number has been more like 40% to 50%. When bond auctions are dealing with billions of dollars, that is a significant drop and one that Fannie Mae and Freddie Mac can’t afford. Fannie and Freddie issue mortgage bonds today to pay off mortgage bonds that mature today from an earlier purchase. The old rob Peter to pay Paul philosophy.

Sunday’s action by the Treasury was really nothing more than a way to guarantee the guarantee. It’s like this. If I owe you $100,000 and you are concerned about whether or not I can pay you back, will you continue to loan me money? What if the United Stated Treasury tells you that they will pay back all the money I owe you plus interest? Are you still concerned about loaning me money? Maybe, but certainly not as concerned. Now, if the government takes over my note with you for the $100,000 are you concerned about getting your money back? You shouldn’t be because one thing that the United Stated government has never done is fail to pay back a debt. That is essentially what happened in this take over.

Now, any investors, whether foreign or domestic, can rest assured that their investment is safe and will more than likely purchase more and more mortgage bonds, which will potentially drive mortgage rates down. I say potentially because there are other economic factors that drive mortgage rates, but on Sunday’s news alone mortgage rates dropped by as much as 0.375% on conforming loan amounts (those under $417,000). Some predict we could see an overall drop in interest rates of as much as a 1%. That sounds a little generous to me but only time will tell.

I do expect the tightening of lending guidelines to continue so it will still be more difficult to obtain a mortgage, which isn’t necessarily a bad thing. It’s just that there won’t be a shortage of money available to borrow, as there has been over the last year or so, which can serve to drive mortgage rates higher as well.

This is good news and is just one more step in the right direction on the road to recovery of the housing market. The only thing that will save this market is house sales and making more money available at lower interest rates will certainly increase house purchase activity going forward, which will then stabilize house values, restore a little confidence and bring an end to this current downturn in the market.

What the Housing and Economic Recovery Act of 2008 Means to You – Part I

On Wednesday, July 30, 2008, President Bush signed into law the Housing and Economic Recovery Act of 2008 (HERA). It is 694 pages and in lieu of boring you to death I have decided to write a few short summaries of the more important changes that may affect you.

The First-Time Homebuyer Tax Credit is probably of greatest interest and will likely benefit the most people.

First-time buyers will receive a $7,500 tax credit if they purchase a home between April 9, 2008 and July 1, 2009. Notice that the credit it is retroactive.

There are several important nuances here that you should know.

• A first-time homebuyer is someone who has not owned a principal residence during the 3-year period ending on the date of the purchase of a new principal residence.
  
  
• The property being purchased cannot be purchased from a relative.
  
  
• Married couples with incomes less than $150,000 qualify for the entire tax credit. The tax credit phases out for married couples with incomes between $150,000 and $170,000. Couples with incomes exceeding $170,000 do not qualify for the tax credit.
  
  
• A single person with an income less than $75,000 will qualify for the entire tax credit. The tax credit phases out for singles with incomes between $75,000 and $95,000. Singles with incomes exceeding $95,000 do not qualify for the tax credit.
  
  
• Under NO circumstances will the credit exceed $7,500.
  

The tax credit is really an interest-free loan from the government that must be paid back over fifteen years, in increments of $500 a year, beginning the with the taxable year following the taxable year in which the principal residence was purchased.

• If you die, your heirs do not have to pay back the remaining balance.
  
  
• If you sell your home before fifteen years have passed and your home’s appreciation is less than the amount you have to pay back, the loan is forgiven.
  
  
• If you turn your home into a rental or investment property, you must pay back the balance due in that taxable year.
  
  
• If you sell the primary residence before the end of the taxable year in which you purchase it then no credit is allowed.
  

I hope this summary has provided you with an understanding of how this particular section of the Act actually works and how it may apply to you.

How Will You Celebrate the Fourth of July?

As we celebrate the Fourth of July this year we should take at least a few minutes to think about what we are really celebrating. Are we simply enjoying a paid day off or are we actually celebrating the independence of this great country? And make no mistake, America is still the greatest country in the history of the world despite what our politicians, the media, and many of our fellow citizens would have us believe.

Today I read an article that appeared in the Philadelphia Inquirer entitled “A Not-So-Glorious Fourth – U.S. Atrocities Are Unworthy of Our Heritage.” In it the author says, and I quote, “This year, America doesn’t deserve to celebrate its birthday. This Fourth of July should be a day of quiet and atonement. For we have sinned. We have failed to pay attention. We’ve settled for lame excuses. We’ve spit on the memory of those who did that brave, brave thing in Philadelphia 232 years ago. The America those men founded should never torture a prisoner. The America they founded should never imprison people for years without charge or hearing.” He goes on to blame the torturers, the government, and you and I. “We were so busy. Soccer practice at 6. A credit card balance to fret. The final vote on Idol. We’ve lost respect. We’ve shamed the memory of Jefferson, Adams and Franklin.” Click here to read the entire article.

I couldn’t disagree with the author more. He has appointed himself judge, jury and executioner and is prosecuting America and its’ citizens because of a single "policy." I think this guy is full of crap but that’s a topic for another conversation.

I believe we have much to celebrate this Fourth of July and I’ve come across a radio address done in 1973 by Gordon Sinclair, a Canadian Radio Commentator, that says why we have much to celebrate better than anything I can say.


Click the play button to watch a 5-minute video of Gordon Sinclair giving his radio address entitled “The Americans.”

Click here for a complete transcript of the radio address.

After reading this transcript or watching an actual broadcast one has to wonder if this was written or recorded in 1973 or just last week. It is amazing to me that 35 years have elapsed yet nothing has changed. In 1973 someone wrote “The aftermath of the Vietnam War resulted in a world-wide sell-off of American investments, prices tumbled, and the U.S. economy was in trouble. The war had also divided the American people, and at home and abroad it seemed everyone was lambasting the United States.” While prices are not tumbling, I think you can see the correlation. Especially after watching the address or reading the transcript.

On the evening of May 15th, 1984, following a regular day’s broadcasting, Gordon Sinclair suffered a heart attack. He died on May 17th. Upon hearing of his death, President of the United States, Ronald Reagan said, “I know I speak for all Americans in saying the radio editorial Gordon wrote in 1973 praising the accomplishments of the United States was a wonderful inspiration. It was not only critics abroad who forgot this nation’s many great achievements, but even critics here at home. Gordon Sinclair reminded us to take pride in our nation’s fundamental values.”

So my challenge to you is to take the 5 minutes to watch and listen to the radio address. Really listen and take a moment to be proud you are an American. Not an African-American, Mexican-American, Asian-American or whatever other politically correct title has been thrown about. Let’s just celebrate being Americans.

Have a safe, fun and happy Fourth of July.

Shawn R Perkins
Your Favorite Lender

New Fee Matrix Drives Mortgage Rates Higher Comparatively Speaking

In an earlier article entitled "Fed Rate Cuts Don't Necessary Mean Lower Mortgage Rates" I answered the question "what are mortgage rates based on?" and that answer, in short, is mortgage-backed securities.

This article is intended to introduce you to a new factor that will affect interest rates and that is the risk-based loan-level pricing adjustment matrix. If you think this isn't important and that it won't affect you, think again!

In December 2007 Fannie Mae & Freddie Mac introduced a new fee called the "adverse market fee", which added 1/4 point (0.25%) fee to all Fannie Mae & Freddie Mac loan products. That means that a zero point loan just became a 1/4 point loan and translates to an extra $1,000 in fee for a $400,000 loan. Not long after they came out with the adverse market fee they introduced the risk-based loan-level pricing adjustment matrix.

You are probably thinking who is Fannie Mae & Freddie Mac and how does this affect me? They are quasi-government agencies that purchase conventional mortgage loans on the secondary mortgage market in order to provide liquidity to lenders so they can make more loans. Since Fannie Mae & Freddie Mac buy the loans it stands to reason that they get to make the rules.

The following matrix only applies to those loans purchased by Fannie Mae & Freddie Mac although the few investors that remain that don't sell their loans to Fannie Mae & Freddie Mac follow a similar, if not the same, matrix.

In order to read the matrix simply find the intersection of your credit score range and loan-to-value range, which is your current loan balance divided by your current home value. The number in the box at that intersection is the mandatory fee that Fannie Mae & Freddie Mac adds to the standard pricing schedule.

The fee is calculated as follows:

(Loan Size x Price Adjustment)/100 = (Mandatory Fee)

For example: ($400,000 x 1.25)/100 = $5,000

The good news is the mandatory fee doesn't have to be paid out of your pocket. Besides the fact that most lenders will allow you to finance the fee, provided you have enough equity to do so, most mortgage lenders will trade 1 point (1.000%) in fee for a 1/4 point (0.250%) in interest rate. This means that if your interest rate is 6.00% and the mandatory fee is 1 point, you can accept a 6.250% interest rate and skip the loan-level pricing adjustment in its entirety. These added fees are making mortgages vastly more expensive or interest rates dramatically higher for lower credit score borrowers.

There is a similar matrix that applies to cash out refinance loans and is in addition to the above-mentioned matrix.


In order to read the matrix simply find the intersection of your credit score range and loan-to-value range. The number in the box at that intersection is the mandatory fee that Fannie Mae & Freddie Mac adds to the standard pricing schedule.

These new fee schedules have been added to mitigate the increased risk Fannie Mae & Freddie Mac are subject to as a result of the current lending environment and, quite frankly, it's only going to get more difficult. I expect new, more stringent, rules to come out regarding condominiums, as they already have gotten more stringent for 2-4 units. So, if you have considered restructuring your mortgage I would suggest you begin the process sooner instead of later because you may find it very difficult or impossible to refinance going forward.

For an excellent explanation of how this situation developed I have included the following 5-minute video clip created by a mentor of mine. If you take the time to watch it you will understand what actually occurred to get us to where we are today.

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Borrowing From Your 401(k) Could Be Hazardous To Your Wealth

Borrowing from your 401(k) plan should be your last resort, not your first. Ideally, you will never touch your retirement funds, allowing them to grow continuously until you retire. But we don't live in an ideal world! With home prices falling and lenders tightening credit, an increasing number of Americans are borrowing money from their 401(k) retirement plans. In the long run, the disadvantages clearly outweigh the advantages.

Taking loans against a 401(k) plan is allowed by law, but an employer is not required by law to allow it. If offered, an employer must adhere to some very strict and detailed guidelines on making and administering a loan. The statutes governing plan loans place no restrictions on what the need or use will be for loans, but an employer can restrict the reasons for loans. Some plans charge fees when you borrow from your 401(k). Plans can charge a one-time fee, a maintenance fee, or a combination or the two.

There are several advantages to a 401(k) loan over other types of loans. A plan participant can borrow up to half of their vested balance, but no more than $50,000. There is no credit check and no qualifying, although you may need a spouse to sign a consent form. You may receive the loan in a matter of days and have up to five years to pay the money back, except when the funds are borrowed for the purchase of a residence, in which case you may have up to 15 years.

You pay interest on the amount borrowed - often the "prime rate" plus one or two percentage points. Interest proceeds then become part of the borrower's plan balance. There is a popular misconception that paying back a plan loan is like paying yourself. While it is true that you are paying yourself interest, when you borrow money from yourself you are simply replacing the interest you would already be receiving from someone else with interest payments from yourself. Paying yourself interest is sound advice when it is an alternative to paying someone else interest, but not as an alternative to receiving interest from someone else.

You repay the loan through automatic payroll deduction with after-tax dollars, plus you lose the compounded interest that you would have received if you had left the money alone because the amount that you borrow is subtracted from the principal balance. You have no flexibility in changing the payment terms of your loan. You also get taxed twice - once when repaying the loan with after-tax dollars, and a second time when the money is withdrawn at retirement.

So, let's say your monthly payment is $300 and you're in a 28% Federal tax bracket. You'll have to make $416 in gross earnings to have enough left after taxes to make the $300 payment. Interest paid on the 401(k) loan is not tax-deductible even if you borrowed the money to purchase a residence.

If you default on a 401(k) loan, you will receive a Form 1099 from the plan because the government considers the defaulted balance a taxable withdrawal. You will be charged Federal and State taxes on the outstanding balance plus a 10% penalty if you are under 59 1/2 years of age.

The biggest disadvantage is the following: If you leave your job, even if it is not your choice to leave, the 401(k) loan comes due and typically must be repaid within 30 to 90 days. If you cannot pay the loan in full you will be charged Federal and State taxes on the outstanding balance plus a 10% penalty if you are under 59 1/2 years of age.

Another disadvantage is the temptation to reduce or eliminate the amount you are contributing to the plan because you now have a loan payment, which will reduce your long term retirement account balance. If you stop contributing while you have an outstanding 401(k) loan, you will also miss out on the company match, provided your company offers a match.

Lastly, when you apply for a mortgage, current lending guidelines state that any 401(k)loan payments will be counted as a debt and included in your debt ratios and any outstanding loans will be subtracted from the your vested 401(k) account value for reserve purposes.

The bottom-line is if you are considering borrowing from your 401(k) make sure you understand the consequences, both good and bad.

Are You Paying Too Much In Property Taxes?

Did you know that over the last eight years, property taxes have actually outpaced even inflation? Those rising taxes – combined with the recent plateau in house values in some areas – means you may be paying more than your fair share.

If you purchased your house or completed construction on your house since 2004, it is possible and very likely that you are paying too much for your property taxes. Some people who purchased in 2003 may even be affected. The current decline in house values is affecting everyone but some areas are affected more than others.

Under Proposition 13, property taxes can be increased annually by no more than 2% to account for increases in your property’s value due to inflation. Shortly after Proposition 13 was passed, Proposition 8 was passed, which allows a temporary reduction in property tax assessments. Under Proposition 8, a temporary reduction in assessed value can be made when the market value falls below the current assessed value. This is an important distinction because the assessed value may not be the same as the market value. Many counties use a formula which uses a percentage of market value to determine assessed value. Your property’s assessed value is shown in the upper right hand corner of your current tax bill as “Net Taxable Value.”

In practical terms, and with the history of real estate appreciation, most assessed values in San Diego County are well below even current market value. Realistically, this will only affect those property owners who purchased their property at the height of the current real estate market.

If you believe your property’s market value has fallen below its current assessed value you should file an Application for Review of Assessment with the Assessor’s Office as soon possible but no later than May 30, 2008. Click here for easy access to the required forms. Submitting an appeal is generally a fairly simple process, but make sure to take the time to fill out all forms in advance and be prepared with your documentation if there is an in-person hearing that needs to take place. My understanding is that due to the high volume of requests the Assessor’s Office will be notifying property owners in early July of the results of their request.

You can mail or drop off the completed forms to the San Diego County Tax Assessor at 1600 Pacific Highway, Room 103, San Diego, CA, 92101.

A word of caution: If you appeal for a lowered assessment and it is determined by the board that the current market value of your property is actually greater than your current assessed value they can increase your property taxes. The bottom-line here is to compare your current market value to the current assessed value on your tax bill to determine if you are even a candidate before you take any action.

Your appeal must be based on the market value of your property as of January 1 of the year in which you are filing. For example, if you file your appeal in 2008, your appeal must be based on the market value of your property as of January 1, 2008. An application must be filed for each year you disagree with the assessor’s value, even if you have a decline in value appeal pending for a prior year.

If you need current comparable sales to your house you are welcome to send me an e-mail to Shawn@YourFavoriteLender.com with the address in question and I will be happy to forward them to you. You may need to submit proof of the decline in value to the assessor along with your request.

If your appeal is successful, the new assessed value will be used to determine your property taxes for the year appealed. The new assessed value of your property, however, does not automatically become the value for the following year. The assessor is required to review your property’s value annually once a decline in value has been determined. He or she will compare your property’s market value with its base year value plus adjustments for inflation. The base year value is the value of your property at the time of the change in ownership from the seller to you or at the completion of construction. The assessor is required to assess your property at the lower of those two values.

According to the National Taxpayers Union, about 33% of property tax appeals succeed! Taking the time to review the accuracy of your tax bill could easily save hundreds of dollars per year, adding up to thousands of dollars during the time that you own your house. Please feel free to contact me at (619)574-6545 for more information on this money-saving tip.

There are numerous private businesses and individuals mailing solicitations to property owners offering their assistance in this process for a fee ranging from $175 to $300. While you are at liberty to use a company if you wish, you can apply for this reduction yourself at no cost by simply filing the application.

The Equity Line of Credit: Safety Net or Web of Deception?

As many of you may have found out recently, a Home Equity Line Of Credit (HELOC) is not the safety net you may have thought it was. Many homeowners with an equity line have received a letter from the lender who holds their HELOC informing them of the following (click on the document to view larger text):

Worse than this is the fact that some lines of credit were completely frozen (click on the document to view larger text).

You are probably asking, how can they do that? Believe it or not, it is in the fine print. My own HELOC agreement states the following (click on the document to view larger text):

The only lines that were reduced or frozen were lines of credit that had an available balance. Lenders wanted to reduce or eliminate homeowners’ access to their equity through their existing equity lines.

Homeowners who had maxed out their HELOCs were not affected by this. Whether they used the HELOC to pay off debt, pay for a remodel project or simply extracted the wealth to protect it and keep it safe and liquid, their lines were left intact because there was nothing to freeze.

Homeowners who had been relying on their HELOCs no longer have access to them. I’ve heard stories of homeowners who were in the middle of a home improvement project and were unable to pay their contractors because they were using their equity line to fund the project. People who were using their equity line as an emergency reserve or fallback plan in the event of a job loss or sudden financial hardship were also adversely affected.

For some of the lenders there is a dispute process but essentially that consists of you paying for a new appraisal ordered through an appraiser that the lender chooses. If the value is determined to have dropped in accordance with the lenders assessment then you are simply out the money. If, however, the appraisal does show the value is higher than what the lender determined it was they still reserve the right to refuse to restore the line of credit to its original amount, which doesn't sound like much of a dispute process, and you are still out the money for the appraisal.

If you are one of the fortunate few that have a HELOC that has not been reduced or frozen you may not want to take a chance that the lender won’t suddenly decide to follow the other lenders that have done just that and send you a letter. I can assure you that it is not typically the kind of news received with a smile. My advice is to look closely at your financial situation and decide whether or not it makes sense for you to borrow the max available to you and put it in a savings account just in case. Yes, I am aware that it comes with a monthly payment but as your equity continues to lose its value wouldn’t it be better to preserve and protect what you have left of it before you end up needing it? Besides, with the Fed lowering rates as they have and will likely continue doing, HELOCs are one of the few instruments positively impacted with a corresponding drop in rate and payment.

In times of uncertainty, one thing is certain. Cash is King!!!

Ric Edelman, author of The Truth About Money says, “A proper financial plan plans for the worst and hopes for the best.” The saying “it’s better to have money and not need it than to need money and not be able to get to it” has never rang so true.

House rich and cash poor is not an option in these changing and trying times. Life happens and you need to be prepared.

The only way to protect your equity and keep it safe is to keep it separated, liquid and accessible. I will talk about profitable equity management in a future article.

Fed Rate Cuts Don’t Necessarily Mean Lower Mortgage Rates

So the Fed cuts rates another 0.75%. Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Federal Reserve can only control the Fed Funds Rate and the Discount Rate. The Fed Funds Rate is the rate at which banks can borrow money from one another on an overnight basis. The Discount Rate, on the other hand, is the rate at which banks can borrow money directly from the Fed on an overnight basis (now a 30 day basis). This is very different from mortgage rates.

A mortgage rate can be in effect for 30 years. A rate that is set by the Fed can change from one day to another. This is a counter-intuitive relationship for most people because when they hear that the Fed is lowering rates, they instinctively think it means mortgage rates.

The Federal Reserve uses the Fed Funds Rate and the Discount Rate to both stimulate and slow down the economy. The Fed watches trends in new jobs, new unemployment filings, worker productivity, wages, housing, both resale and new construction, and inflation at the consumer and producer level.

The Federal Reserve is trying to maintain a “healthy” economy. If the economy is growing too fast the Fed will raise rates to slow down economic growth. If the economy is slowing down, as it is currently, the Fed will cut rates, and sometimes aggressively, in an attempt to stimulate economic growth.

So what are mortgage rates based on? The answer is mortgage-backed bonds known as Mortgage-Backed Securities (MBS). How these bonds issued by Fannie Mae and Freddie Mac perform will determine the direction of mortgage rates.

It is not necessarily what the Fed does that affects mortgage rates, it’s how the Nasdaq and the broader stock market interprets the Fed’s action and policy statement that will ultimately influence the direction of mortgage rates. This is because money managers and mutual fund companies typically keep funds in either stocks or bonds with very little in cash. If stocks are in favor, money is pulled from bonds, causing bond prices to drop and interest rates to rise. When stocks are being sold off, the money is then parked into bonds, which improves bond prices and causes interest rates to decline.

If the Fed Funds Rate and mortgage rates were truly related, the chart shown here wouldn’t show them going in opposite directions – all three lines would move in tandem.

Fed rate cuts can fuel inflation, because lower rates just serve to make it more attractive to buy and finance goods and services. If the economy grows too fast, as has been the case for the last five or so years, inflation can become a problem for the consumer (you and me).

The Federal Reserve is doing all it can to keep this country from going into a recession. While the Fed normally seeks a balance between economic growth and inflation, in this case the Fed has essentially decided to sacrifice inflation to save the economy. That is not to say that the Fed is turning a blind eye to inflation. They are just focusing more attention on keeping the economy from slipping into a recession. There is a concern about the possibility of Stagflation. Those who remember Nixon remember Stagflation. This is a situation where the economy stalls and inflation rises simultaneously. In other words, people are losing jobs, making less money, and spending more to buy the basic necessities of life because of inflation.

I wouldn’t want to be Ben Bernanke is these trying times. To summarize, Fed rate cuts do not necessarily equal lower mortgage rates. There are a variety of factors that influence mortgage rates and it is important for people to know that so they don't wait for the next Fed rate cut to refinance or purchase and miss the boat because what they thought to be true turned out not to be.

Want To Be More Conservative With Your Mortgage Financing? Make A Smaller Downpayment!

Equity investments (a.k.a. downpayments) in Real Estate earn a 0% Return On Investment (ROI). Surprised? Well, let's understand the math: Assuming a 5% annual rate of appreciation, a home purchased for $400,000 will appreciate to $420,000 in one year. If the homeowner originally invested $80,000, or 20%, theoretically, the ROI is 25%. This is true because it appears that the initial $80,000 downpayment yielded $20,000 in equity appreciation. However, it is important to note that the $80,000 had nothing to do with the $20,000 appreciation.

If the homeowner had not invested the $80,000, the home would still be worth $420,000 in one year. In this instance, the ROI is infinite because the homeowner invested nothing and yet received the same $20,000 in appreciation. However, we must take into account that the rate of borrowing will be higher in this example because there is no downpayment.

Using a 7.00% Home Equity Line of Credit (HELOC) to finance the $80,000, the payment will be $5,600 in Year 1. The second example yields a return of at least 357% because the $5,600 additional payment yielded the $20,000 in appreciation.

There are other ROI considerations for the homeowner. A home is a non-liquid asset, meaning that once the homebuyer's money is invested in the home, there is a real cost to extracting the money as cash.

The initial $80,000 investment, therefore, is "lost" -- tied up in equity until the homebuyer sells, refinances, or takes out a HELOC.

Not only is the initial $80,000 investment earning 0% return for the homeowner, it is unavailable for other investments which could be earning 2% as a Money Market Mutual Fund, 5% as a Certificate of Deposit, or even higher returns with other instruments.

Therefore, the opportunity cost of making a downpayment is further depleting ROI for homeowners.

A "conservative" person will read this argument and say, "That's too risky. I am too conservative to make small downpayment."

I can buy that argument, but those two sentences are not related at all.

A true "conservative" person will recognize that the smaller the amount of downpayment, the larger the risk that the bank is taking. As the homebuyer's downpayment shrinks, so does his personal exposure.

"What if the property depreciates! Then I'll be exposed!" they'll say next.

That's true, but if the property depreciates, there is no advantage to your initial equity investment anyway. I'm sorry, but Out of sight, Out of mind is no way to manage your equity investments and finances.

The reality is the conservative financing option is to make smaller downpayments. In doing so, you push risk to a third party -- the bank! -- and you remain very liquid.

Liquidity is the true goal of a conservative investor.

I am not arguing against making downpayments on properties, for the record. But, for people who claim that Real Estate is an investment, they should treat it as such. This is consistent with my philosophy that a mortgage should be one component of a larger (managed) financial plan.

The advantages to making an equity investment in property is that the resultant monthly mortgage payment is lower. If a homebuyer's monthly cash flow is low, but their investment capital is high, there is an argument for putting 20% or even more into the property. There is also tremendous psychological inertia to overcome with respect to putting less than 20% into a property. Some people just won't hear it any other way.

That's fine -- different strokes for different folks!

Okay, with all of this said, there is actually a return on the equity investment. That return is the money saved by not paying interest on the higher loan amount if no downpayment is made. That means that the homebuyer saved an amount equal to the interest rate on the loan, or 7.00% in this case. So which is the more conservative strategy; 1) Investing a large downpayment to secure a lower monthly mortgage payment, leaving little money in reserves, or 2) Investing very little or no downpayment, paying a slightly higher monthly mortgage payment and leaving a large reserve to cover the increased payment as well as life's inevitable unscheduled emergencies?