By THE ASSOCIATED PRESS

September 03, 2010

WASHINGTON — Federal Reserve Chairman Ben Bernanke told a panel investigating the financial crisis that regulators must be ready to shutter the largest institutions if they threaten to bring down the financial system.

“If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved,” Bernanke said yesterday while testifying before the Financial Crisis Inquiry Commission.

Bernanke also said it was impossible for the Fed to rescue Lehman Brothers from bankruptcy in 2008 because the Wall Street firm lacked sufficient collateral to secure a loan. Lehman’s former chief executive told the panel a day earlier that the firm could have been saved, but regulators refused to provide help.

The Fed chief presented his analysis of the crisis and views on potential systemwide risks as the panel approaches the end of its yearlong investigation into the Wall Street meltdown.

The financial overhaul law enacted this summer gives regulators the authority to shut down firms when their collapse poses a broader threat to the system. The process resembles the one used by the Federal Deposit Insurance Corp. to close failing banks.

FDIC Chairman Sheila Bair told the panel “the stakes are high” for regulators to effectively exercise their new powers.

If not, “we will have forfeited this historic chance to put our financial system on a sounder and safer path in the future,” Bair said. “The tools are there. The regulators have to use them,” she testified.

Panel Chairman Phil Angelides said the new law will be an enormous test of will of the regulators.

Bair and Bernanke said tougher rules and market pressures will lead huge firms to voluntarily shrink themselves. Executives can no longer count on the government to bail them out if they veer toward failure, they said.

Bernanke said bailing out these institutions is not a healthy solution and great improvement will come from the new law. “Too-big-to-fail financial institutions were both a source … of the crisis and among the primary impediments to policymakers’ efforts to contain it,” Bernanke said.

“We should not imagine … that it is possible to prevent all crises,” he said. “To achieve both sustained growth and stability, we need to provide a framework which promotes the appropriate mix of prudence, risk-taking and innovation in our financial system.”

Bernanke led the economy through the financial crisis and the worst recession since the 1930s. The Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system.

5 Key Lessons in August’s Jobs Report

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Liz Wolgemuth, On Friday September 3, 2010, 12:04 pm EDT

August’s jobs report is shining a little light on the ploddingly dreary labor market. Private employers added more jobs than economists expected last month, and the Labor Department revised the data to show bigger private sector gains for June and July. In July, private employers added 107,000 jobs, rather than the 71,000 initially reported. The unemployment rate last month ticked up to 9.6 percent from 9.5 percent in July, reflecting an increase in the size of the labor force.

[See 21 secrets to landing a job now.]

This report offers some important lessons to help understand the current job market and how it’s measured. Here are some things to keep in mind:

The headline number often doesn’t mean much. The number of jobs lost or gained for the month will always be the first thing reported, but the truth is that it’s often a very misleading figure. Let’s look at August. Non-farm payroll employment fell by 54,000 jobs–that’s the headline figure, and it’s negative. More job losses are certainly the last thing anyone wishes to see at this point in the recovery. But if you look deeper, you’ll see that the government cut 114,000 temporary census jobs last month. At the same time, total private sector employment increased by 67,000 jobs. Private-sector employment is the real barometer, not the sum of short-term government jobs.

Job numbers are just differences. Often, job data is reported in a way that can be confusing. Let’s say a news report says “private sector employers added 67,000 jobs last month.” That can sound a bit like all the private businesses in the country made just 67,000 hires altogether last month. In truth, American businesses hired millions of people last month. Consider that in June alone (the most recent month for which there is data) U.S. public and private employers made nearly 4.3 million hires. Retailers alone made 593,000 hires in June. The problem is that people lose or leave jobs in similar volumes. Economists call this “churn,” and there’s a lot of it–every month.

[See 5 strategies for the 'new normal' job market.]

The long-term unemployed are missing out on the churn. Last month, there were 6.2 million people who had been out of work for six months or more. You might ask, given the millions of hires employers make each month, why some people have been unemployed for a year or two–or more: Wouldn’t they eventually get caught up in the churn? This is one of the most troubling aspects of this recession. There could be several reasons. Many of the people struggling with long-term unemployment have found that their skills aren’t matching up with what employers are looking for. Also, in general, the longer people are unemployed, the harder it is for them to find work, whether it’s because they become stigmatized or because they are gradually become less aggressive job seekers. One possible policy response would be a tax credit for employers that hire a person who has been out of work for six or months or more.

A higher unemployment rate can actually be a good thing. Yes, this sounds ridiculous. Last month, the unemployment rate ticked up 0.1 percentage point to 9.6 percent. “It’s worth noting that this was entirely attributable to a spike in the labor force–the household survey actually showed employment up 290,000 in August,” Morgan Stanley economists Ted Wieseman and David Greenlaw said in morning note.

[See why your job interviewer's chair could hurt you.]

Consider an economy that’s really in the dumps, with employers unwilling to hire. Hopeless job seekers run out of benefits and give up their job search instead relying on the income of a spouse or family member or another form of support. The people quitting their job search drive down the number of officially unemployed and shrink the labor force–and that can drive down the unemployment rate. Consider the opposite: Previously hopeless job seekers begin to see a better local job market, the headlines sound more promising, and their friends are beginning to find jobs, so they head back into the labor market. They pick up the phone and call a contact about an opening they spotted, or they fire off their resume online. They officially move back into the job market, but they aren’t employed just yet–they’re looking. This can drive the unemployment rate up, but it’s a very positive thing for the economy that people are participating in the labor market again.

Back to August: “The labor force increased by 500,000 indicating that people are more encouraged about the labor market and decided to look for work boosting the jobless rate to 9.6 percent from 9.5 percent,” says Sung Won Sohn, an economist at California State University-Channel Islands.

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Slow growth will have Washington seeking stimulus. This may be a better-than-expected jobs report, but the job growth is still very small. The economy needs to be adding hundreds of thousands of jobs every month to absorb new people entering the job market and put the unemployed back to work. So lawmakers may be looking for more stimulus. “There is a good chance that the Obama Administration will introduce a set of targeted economic stimulus programs,” Sohn says. “Payroll tax relief to encourage new hiring for small businesses is a good possibility. State and local governments are laying off employees as revenue falls. Some assistance from Washington could stem job losses here.” Shortly after the release of the August jobs report Friday, President Obama encouraged lawmakers to pass a $55 billion bill that would provide additional loans to small businesses. Housing stimulus may also be coming–along with more unemployment benefit extensions, Sohn says.

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Wednesday, September 1, 2010

Let’s say you have just retired and want to invest your savings to produce steady income. You could buy immediate annuities, which provide a nice payout since a lot of the money you get in the monthly checks is a return of principal.

Absent special provisions, annuities die when you do. But while you are alive they pay well. Thus, they protect you from the risk of outliving your savings.

If you are a 70-year-old male, for example, you can get $630 a month for life from insurer New York Life by plunking down $100,000. That’s a 7.6% annual payout, a lot more than you could get from other relatively safe investments, like bank CDs and U.S. Treasury bonds.

But annuities come with two hazards. One is that an insurer might go bust. You can protect yourself against the worst by buying only from insurers with high financial ratings and by spreading your capital around. Instead of buying one annuity for $300,000, you could buy three $100,000 annuities from different companies. It’s unlikely that all three will go the way of AIG.

The other risk is inflation, and this is not so easy to combat. Here are six ways to cope with a rising cost of living. All have drawbacks.

1. Buy an annuity with an inflation rider. By accepting a lower initial payout, you can get a promise from the insurer to raise your check to keep up with the Consumer Price Index.

Advantage: You don’t have to guess how high inflation will be. Disadvantage: The rider may be hard to find — and is going to cost you a pretty penny. That’s because the insurer doesn’t know how high inflation will be, either, and has no cheap way to cover its bets. Note that the inflation-adjusted versions of U.S. Treaury bonds (called TIPs) carry a tiny 1% real yield.

2. Get a fixed annual bump-up. With an automatic 2% annual increment (irrespective of what happens to the CPI), New York Life’s payout for the 70-year-old male investing $100,000 drops from $630 to $533.

Advantage: Because the insurer knows in advance what its payouts will be, it can fund them by investing in conventional (not inflation-adjusted) bonds. Those bonds have much better yields than TIPs, so the insurer doesn’t have to be so chintzy with its payouts.

Disadvantage: You might experience worse inflation than the 2% (or whatever you choose) that is built into your annuity policy.

3. Buy in stages. Instead of putting $300,000 into annuities at age 65, you could do $150,000 now, then buy more at age 70, says Martha Kendler, who oversees annuity sales at Northwestern Mutual. If inflation has resurfaced by then, interest rates will be higher and you will get a better monthly return as a result. (Remember, the insurance company is covering its obligations by investing your cash in fixed-income assets like corporate bonds.) Even without any rise in interest rates, the monthly payout is going to be better for longevity reasons. That’s because 70-year-olds, on average, don’t have as many years left to collect as 65-year-olds do.

Advantages: You can invest the $150,000 for five years, and presumably will have more than that sum in 2015 to use on annuity purchases; you get a higher monthly payout per dollar invested, because you’re older; and you get a peek at the Grim Reaper’s plans for you. If your health is very poor at age 70 you just don’t buy the second annuity.

Disadvantage: You’ve missed five years of monthly payouts.

4. Buy stocks instead. The S&P 500 stock index yields about 2%. Stocks have a history of enjoying dividend hikes that, over a long period, more than keep up with inflation. Indeed, without being considered a spendthrift you could both cash the dividend checks and also sell off 1% or 2% of your portfolio every year to help pay the rent. It’s likely that you could continue that spending behavior indefinitely without depleting your capital.

Advantage: If you can get by on just the dividends plus a 2% withdrawal of capital, you are likely to leave a nice pot for your heirs.

There are two disadvantages. One is risk. Dividends get cut in a recession. And what if we get a 25-year bear market in stocks? What if you own a disproportionate amount of the next Enron or AIG? The other problem is that you cannot match the 6% to 8% payout that retirees can get on annuities. Take 7% a year out of a stock portfolio and there is a significant chance that, by time you turn 80, you will be sleeping on the sidewalk.

5. Buy a government annuity. Here’s the deal. You start collecting Social Security at age 62 (we’re assuming you are out of the workforce). If you’re still healthy at 70, you refund all your Social Security checks to that point and reapply. That entitles you to a much higher lifetime benefit, and this benefit is adjusted for inflation. “In effect you are buying an inflation-protected annuity from the government,” explains Matthew McGrath, a managing partner at Evensky & Katz, financial planners in Coral Gables, Fla.

Advantage: The terms are very good. Each dollar spent at age 70 buys a much bigger increment in monthly benefits than you could get from a commercial insurer. Disadvantage: The terms are too good. McGrath warns that Congress is likely to curtail or eliminate the payback option.

6. Live with it. Plan on a fixed monthly income during retirement. Your purchasing power will gradually decline (assuming we don’t get deflation). Maybe that’s something you can stand. It would mean more traveling at age 65 than at age 75. Advantage: You go to Europe when you are still young enough to enjoy it. Disadvantage: Other costs, like medical costs, may go up a lot.

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By BRIAN BOYD

bboyd@s-t.com

September 01, 2010

Besides stocking up on water and batteries, Cape homeowners may want to check their insurance policies, in case Hurricane Earl wreaks havoc this weekend.

Home insurance policies typically will cover damage caused by wind and rain, but they often include deductibles that could leave homeowners on the hook for thousands of dollars. Flood insurance might also pay for related damages, depending on the circumstances.

“The problem is going to be the deductible,” said Charles Robinson, president of Rogers & Gray Insurance Agency, a South Dennis company that serves Southeastern Massachusetts. “Either one or both policies will cover the typical homeowner. The issue for homeowners is how much they have to pay out of pocket at first. That’s going to vary by company and depend on elevation and distance (from the coast).”

The deductibles are typically based on 2 percent to 5 percent of the insured amount. In other words, if a home has a $300,000 policy and a 2 percent deductible for wind damage, the owner could have to pay for up to $6,000 in damages.

Homeowners might have to pay for deductibles whether they have a private insurer or rely on the FAIR plan, the government-sanctioned insurer of last resort for property that private insurers will not cover.

Depending on the policy, there can be deductibles for wind, named storms, or hurricanes. If the damage is caused by a tropical storm, a hurricane deductible would not apply, Robinson said.

It’s better to know a policy’s fine print before a storm hits. Homeowners who think they have a $500 deductible could be shocked to learn after the fact just how much they have to pay, said John R. Beauregard, vice president at Sylvia & Co. Insurance Agency Inc. in Dartmouth.

“One of the most important things you can do is check your homeowner’s policy to see what the level of the deductible is,” he said.

Paula Aschettino, an Eastham resident and founder of Citizens for Homeowners Insurance Reform, said homeowners could face pretty large bills before insurance kicks in, depending on how high the deductible is.

She said her home is insured by a private company, and her replacement value is considered to be $650,000 because it dates to the 19th century. She has a 5 percent wind damage deductible, leaving her to potentially pay for more than $32,000 in damages.

“It would have to be awful big damage for insurance to have to cover it,” Aschettino said.

If a tree hits a house, tree removal is covered as part of the damages. However, some policies will also provide up to $500 for removal of trees that fell but did not hit the house, Robinson said.

Many homeowner insurance policies also cover food spoilage, but the payments could be limited to $500 or $1,000 and include a deductible, he said.

Flooding is not covered by regular homeowner insurance.

“If the wind blows the roof off the house, and it’s pouring rain, and the rain flows into the house, that is covered by a homeowner’s policy,” Beauregard said. “If it comes from the ground up, that is not covered under a homeowner’s policy.”

Depending on the situation, flood insurance might not cover the flooding damages. The water has to come from a defined source, such as a river or stream, and inundate two acres, he said.

When it does apply, flood insurance, which is provided by the National Flood Insurance Program, will cover damage to the building and personal belongings inside.

There are limitations for basements. For example, carpeting and personal property such as clothing located in the basement are not covered, according to the program’s website.

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Alan Zibel, AP Real Estate Writer, On Tuesday August 31, 2010, 9:02 am

WASHINGTON (AP) — Home prices rose in June for the third straight month amid a burst of home-buying due to tax incentives that have since expired.

The Standard & Poor’s/Case-Shiller 20-city home price index posted a 1 percent increase in June from May and was up 4.2 percent from a year ago. Home prices nationally were up 4.8 percent in the second quarter compared with the first quarter, largely due to government tax credits of up to $8,000 that caused sales to surge.

Seventeen cities showed price gains on a monthly basis. Prices in Seattle and Portland, Ore. were flat from a month ago, while prices in Las Vegas fell.

Nationally, prices have risen 6 percent from their April 2009 bottom. But they remain 28 percent below their July 2006 peak.

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Stocks fall as traders cautious ahead of monthly jobs report; personal spending inches higher.

Stephen Bernard, AP Business Writer, On Monday August 30, 2010, 1:01 pm EDT

NEW YORK (AP) — Stocks fell Monday after further signs of slowing growth added to caution ahead of the government’s crucial jobs report later in the week.

The Dow Jones industrial average fell nearly 50 points in afternoon trading. Broader indexes also dropped. With investors concerned about the health of the economy, money again flowed into the bond market, sending interest rates lower.

A report Monday showed personal income rose less than expected in July, adding to the string of data that points toward a slowdown in growth during the second half of the year.

“The personal income report did little to ease the nervousness about the trajectory of the economy,” said Alan Gayle, senior investment strategist at RidgeWorth Investments. The report did show spending was up in July, but without consistent growth in income, any increase in spending is likely temporary, Gayle said.

Investors have been focusing on employment data as a key way of predicting where the economy is going. Signs of a slowdown in growth has plagued the market for more than a month. Investors are unsure if companies will be able to keep up strong earnings growth if the recovery runs out of steam or falls back into recession. And consumers aren’t likely to spend more until there are clear and regular signs of hiring.

“You have to prepare for slower growth,” said Mark Tepper, managing partner at Strategic Wealth Partners. “As consumer spending goes down, businesses will experience lower earnings.”

Investors have been betting in recent weeks that the weaker economic reports will translate into smaller earnings that previously thought. That, in turn, has helped drive stocks lower to match the diminished expectations.

Several stocks were moving on the latest flurry of corporate news. Genzyme Corp. rose after rejecting Sanofi-Aventis SA’s $18.5 billion takeover offer, while Hewlett-Packard Co. rose after saying it plans to buy back stock. Cogent Inc. jumped after agreeing to be acquired by 3M Co.

In afternoon trading, the Dow fell 47.57, or 0.5 percent, to 10,103.27. The Standard & Poor’s 500 index fell 4.92, or 0.5 percent, to 1,059.67, while the Nasdaq composite index fell 11.16, or 0.5 percent, to 2,142.47.

About two stocks fell for every one that rose on the New York Stock Exchange, where volume was 297.9 million. Volume has been light over the past month as investor uncertainty keeps some traders out of the market completely.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 2.55 percent from 2.65 percent late Friday. Its yield is often used to set interest rates on mortgages and other consumer loans.

Biotechnology company Genzyme said Sanofi-Aventis’ $69 per share offer undervalues the company. Genzyme shares jumped $2.53, or 3.7 percent, to $70.15, while Sanofi fell 1 cent to $28.91.

Cogent jumped $1.89, or 21.1 percent, to $10.80 after manufacturer 3M said it would buy the maker of fingerprint scanners for $10.50 a share. Shares of 3M dipped 58 cents to $80.42.

Hewlett-Packard said it plans to repurchase $10 billion in stock. The computer company plans to buy back shares, in part, to offset dilution from employee stock plans. Hewlett-Packard shares rose $1.07, or 2.8 percent, to $39.07.

Stocks have largely been moving on major economic reports and less on individual corporate news during the past month. Because the Labor Department’s monthly employment report doesn’t come until Friday, investors will look for signs earlier in the week about the jobs market.

In economic news Monday, the Commerce Department said personal income rose 0.2 percent last month, falling below economists’ forecast for 0.3 percent growth, according to Thomson Reuters.

Personal spending did climb 0.4 percent in July, the biggest jump in four months. Economists had forecast spending would rise 0.3 percent. But with income and hiring still sluggish, analysts say shoppers won’t be consistently spending more.

The Institute for Supply Management releases its monthly manufacturing survey Wednesday, which has an employment component to it. Payroll company ADP also releases its data on private jobs growth Wednesday.

The Labor Department releases its weekly report on unemployment claims Thursday. New claims fell last week, but remain at elevated levels. That indicate employers are not adding new workers, even if they aren’t firing too many employees either.

Japanese markets surged overnight after the country’s central bank approved new stimulus measures aimed at sparking growth and putting the brakes on a strengthening yen. The yen recently hit a 15-year high against the dollar, which hurts Japanese manufacturers, like Sony Corp., Panasonic Corp. and Toyota Motor Corp., that rely heavily on exports. Japan’s Nikkei stock average rose 1.8 percent.

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Real Estate Foreclosure: Ways to Prevent Property Repossession or Lessen Credit Damage

AReal estate foreclosure is a stressful event that can be frightening and embarrassing. No one wants to lose their most valuable asset and be uprooted from their home. However, options exist that can help borrowers prevent foreclosure or lessen credit damage.

When real estate foreclosure occurs, credit scores can plummet by 100 points or more. Individuals facing foreclosure have usually incurred credit damage due to late mortgage payments. Further reduction of FICO scores could place them into a high-risk category, which in turn makes obtaining credit more difficult and expensive.

To add insult to injury, banks can obtain court-ordered judgments which hold mortgagors financially responsible for any deficiency between the purchase price and loan balance. Since bank owned real estate is typically sold at 10- to 20-percent below market value, deficiency judgments can amount to thousands of dollars and take a lifetime to repay.

The combination of foreclosure and deficiency judgments can cause serious damage to credit scores and make it nearly impossible to obtain financing of any kind. While real estate foreclosure remains on credit reports for 10 years, deficiency judgments are reflected for up to 7 years after the debt is fully paid.

One of the primary reasons homes fall into foreclosure is because borrowers are not proactive. Contrary to popular belief, banks do not want your house. When mortgagors take action early on they can often negotiate a payment plan to cure mortgage arrears and get back on track with future payments.

Once borrowers default on home loan payments their account is assigned to a bank loss mitigator. This person is responsible for keeping bank losses to a minimum, so they prefer to help borrowers create a plan so they can keep their house. If borrowers are financially incapable of curing mortgage arrears, loss mitigators can offer solutions which make the foreclosure process less costly.

The most common options offered to mortgagors facing foreclosure include loan modification, mortgage forbearance, and mortgage refinance. Mortgage lenders typically require borrowers to submit financial records to determine which foreclosure prevention option is best suited.

If borrowers do not qualify for these options, banks might offer a real estate short sale. The short sale process is complex and time-consuming, but can reduce the impact against credit scores. It is best to work with a real estate lawyer to ensure documents are submitted in a timely fashion and to obtain a payment in full agreement.

Payment in full means lenders agree to accept the short sale purchase price as payment in full toward the loan balance. It is best to obtain legal advice when lenders issue short sale deficiency judgments. Depending on the circumstances, it might be better to request a deed in lieu of foreclosure.

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Deed in lieu requires borrowers to hand over the keys to their house and walk away. Borrowers are not entitled to any funds if the property is later sold for more than was owed on the loan. Banks can issue deficiency judgments with deed in lieu contracts, so be certain to understand the process before signing an agreement.

Although real estate foreclosure can be demoralizing, realize life will go on if the bank repossesses your house. There are numerous rental properties owned by landlords willing to work with tenants unable to pay security deposits and upfront rent payments. It may take time to find the perfect house with the perfect landlord, but they do exist.

Last, but not least, if real estate foreclosure occurs it is important to commence with credit repair strategies as quickly as possible. If necessary, obtain credit counseling or conduct research to learn credit restoration techniques. Individuals that commit to rebuilding their credit could potentially qualify for a mortgage loan within a few years.

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By Harry Gross

Daily News Personal Finance Columnist

Dear Harry: I lost quite a bit in the market washout a few years ago. I’m now pretty leery about the stock market. I have been looking into the real-estate market for rental properties. My thought is to buy now when the prices are at a low point and rents are pretty stable. I hope to at least break even on the rent and costs and later sell the property at a good gain when the market for real estate goes up. I know it will because it always has in the past. I have never invested in real estate, so I’d like to have your input on the idea.

What Harry says: Let me give you a number of things to consider. First of all, recognize that no matter who you have helping you, it is not a passive investment like stocks and bonds. There is the problem of getting and holding tenants, setting and collecting rents, maintenance, mortgages, escrow accounts, etc. With rental units showing high vacancy rates, you could very easily not break even on your costs. That could put you into a pretty deep hole before you choose to sell. And there is no certainty that you’ll be able to sell the property at a profit in the near future. The real-estate boom earlier in this century was an illusion. It came about because of lax lending standards and favorable mortgage terms together with excessive greed. On the other hand, you may know that I have said in the past (and it’s still true) that more quiet substantial fortunes are made in real estate by people whose names you’d never recognize.

Write Harry Gross c/o the Daily News, 400 N. Broad St., Philadelphia, PA 19130. Harry urges all his readers to give blood – contact the American Red Cross at 800-Red Cross.

Instant View: New home sales at record low in July

On Wednesday August 25, 2010, 10:23 am EDT

NEW YORK (Reuters) – New U.S. single-family home sales unexpectedly fell in July to set their slowest pace on record while prices were the lowest in more than 6-1/2 years.

KEY POINTS: * The Commerce Department said sales dropped 12.4 percent to a 276,000 unit annual rate, the lowest since the series started in 1963, from a downwardly revised 315,000 units in June. * Analysts polled by Reuters had forecast new home sales unchanged at a 330,000 unit pace last month.

COMMENTS:

WAYNE SCHMIDT, CHIEF INVESTMENT OFFICER, GRADIENT INVESTMENTS, ST. PAUL, MINNESOTA:

“It was down quite a bit from June, which probably isn’t a total surprise. It just shows the weakness in the housing market. We were a little bit propped up with the government incentives and now that they are behind us, we are left with the realities of the home market.

“It raises the concerns for that double-dip recession. Housing is certainly an important part of the economy and it’s been down and out for a while. That ups the ante for a double-dip.”

RONALD SIMPSON, MANAGING DIRECTOR, GLOBAL CURRENCY ANALYSIS, TAMPA, FLORIDA:

“I don’t think anybody was expecting a good new home sales report based on the existing home sales data yesterday. Dollar/yen moved down near 84 but it’s back up at almost 84.50 now. I think the knee-jerk move was based on the equity market reaction. Overall, the U.S. economy is not looking too good. It seems to me that more recently, we’ve seen the dollar move lower against the yen and the euro on the back of weak economic data. I’m just wondering how long the dollar is going to maintain its safe-haven status.”

STEVEN RICCHIUTO, CHIEF ECONOMIST, MIZUHO SECURITIES, NEW YORK:

“There is nothing good you can say about the number. There was downward revisions to the previous month, a much weaker headline number, broad-based weakness, average immediate home prices still moving down and showing the market is still not clearing at these lower prices, and month supply of homes moved up a lot simply because the selling rate dropped so much — it is a bad report through and through, there is nothing in the details to tell you that things are improving whatsoever.

“The odds of the dreaded double-dip are increasing. I’ve been one of the only people in the double-dip camp explicitly, but more and more of the people who have been playing in the game of what is the probability — 20 percent, 30 percent — are going to start saying maybe it is 50 percent.

“You are getting a confluence of negative numbers.”

MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, BNY MELLON, NEW YORK:

“After yesterday’s existing home sales data, another disappointing July housing number was not that unexpected. Still we had quite a shock yesterday. The volatility in the housing data has been in part due to the government incentives provided for first-time home buyers. The assumption to be made about the health of the housing market is that it’s weaker than we thought and could get weaker. I wouldn’t say this is proof of a double-dip, but clearly the economy is slowing markedly, and it’s a broad-based slowdown. I think it’ll be difficult for the dollar to rally against the yen in this environment, though it’s worth noting that yen gains on the crosses — against the euro, sterling and elsewhere — have been even more remarkable. It’s been a more disorderly move.”

TOM PORCELLI, SENIOR ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:

“There has been nothing good that has come out of housing over the last several months. We don’t expect that to change anytime soon. What we are seeing is the downside of government intervention. It had fanned expectations of a market bottom when in fact, it created a false bottom. We expect home sales to stay at this remarkably low range with remarkably high unemployment. There is also little demand for lending.

“What does this mean for home prices? Home prices are back into negative territory on a year-over-year basis. We see home prices could fall another 15 percent from here.

“I don’t think housing alone could push us into another recession because it’s not big enough at this point. But the risk of a double-dip recession is meaningfully high.”

MARKET REACTION: STOCKS: U.S. stock indexes fell, but recovered losses. BONDS: U.S. Treasury debt prices added to gains. DOLLAR: U.S. dollar erased gains against the yen.

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Homeowners who had to sell because of a change in place of employment can qualify for reduced tax. You must prove that the job change occurred while you owned and used the home as your primary residence, and that your new job is located at least 50 miles farther from your residence than your previous place of employment.

A reduced exclusion from capital gains tax may also be granted for health reasons. If your motivation for selling your house was to obtain diagnosis, treatment or cure for a disease or injury to you or a family member, you can apply for an exclusion. Unforeseen circumstances such as death, unemployment, divorce or natural disasters may also reduce your capital gains tax. Consult a tax professional for advice about your unique circumstance.

Read this online and get more information: Capital Gains Exemptions

Mortgage Fraud Is Rising, With a Twist

Adapting to Tighter Rules After Collapse, Scammers Turn to More Complex Plots

By ROBBIE WHELAN

New data suggests that mortgage fraud—which got tougher to pull off after the collapse of the U.S. real estate market—is returning in a big way.

Data prepared for The Wall Street Journal by research firm CoreLogic, examining about seven million home loans made by hundreds of lenders, show that losses from mortgage fraud—ranging from falsified credit reports to identity theft—rose 17% last year after declining 57% in the two years after its 2006 peak.

In 2009, $14 billion in loans, or about 0.7% of all mortgage loans made in the U.S., were originated with fraudulent application data.

The figures are a fraction of the mortgage market, but the increase is sharp.

CoreLogic, which tracks fraud only by mortgage value, examines about 7 million loans each year using a proprietary computer program that detects discrepancies in loan documents and predicts the likelihood of fraud. The real losses to banks won’t be known for several years when banks are forced to write off the value of the loans’ value.

Some of CoreLogic’s profits come from selling market research to lenders aiming to cut losses from mortgage fraud.

Investigators and lenders say they are seeing a similar upswing in fraud.

The Federal Bureau of Investigation in June indicted a Phoenix man for mail and wire fraud among other alleged crimes when the agency says he tried to steal a house from his landlord. Also in June, federal prosecutors in New Jersey charged 29 defendants—including 12 real-estate agents, four mortgage consultants, an appraiser, a bank employee and a mortgage broker—with wire fraud in an alleged scheme involving 17 properties in the state and losses of $5.5 million.

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“Even though we have certain compliance measures in place, people will adapt whatever scheme,” said Sharon Ormsby, the FBI’s section chief for financial crimes. “It doesn’t matter if the market is going up or down.”

The kinds of fraud that contributed to the mortgage crisis and the collapse of the housing market were relatively simple. Crooks took advantage of the size of mortgage loans and the lax rules governing who qualified for them.

In one common con, they would recruit as accomplices “straw buyers” with good credit to apply for “no-doc” loans, which required no documentation or proof of income, to buy their house. Good credit was required because lenders generally did check a borrower’s credit score, even if they didn’t require pay stubs or bank statements.

When the bank sent funds, typically to make a down payment or for a home-equity loan, the schemers and the fake buyer would split the profits and walk away, leaving the house to fall into foreclosure and the bank stuck with the loss.

Since the mortgage crisis, banks and the government-sponsored entities that underwrite or insure mortgages, including Fannie Mae, Freddie Mac and the Federal Housing Administration, have tightened lending standards and closely scrutinize mortgage applications.

No-doc loans are a thing of the past, and many lenders now require borrowers to furnish proof of employment, tax forms, credit reports, bank statements and other documents.

Fraudsters have adapted to the new restrictions. With banks less apt to lend to borrowers with shaky finances, criminals rely more on falsifying documents, recruiting loan officers and other bank insiders to work for them, and stealing identities to get loans, federal investigators and mortgage industry research reports.

In the Phoenix case, prosecutors allege, Jose Victor Buencamino did all three. Some people who knew Mr. Buencamino describe him as a large, friendly man devoted to his children, the life of many a party and a passionate golfer. Gary Weaver, who rented a home to Mr. Buencamino last year, has a different impression. He said the Arizona businessman tried to snare him in an elaborate mortgage scheme.

According to a federal indictment unsealed in June, while Mr. Buencamino was renting Mr. Weaver’s house on the golf course at Moon Valley Country Club, he intercepted mail intended for Mr. Weaver and obtained his social security number, then applied for a driver’s license in Mr. Weaver’s name.

Then, the indictment alleges, with the help of a friend who worked as a loan officer at a local branch of Compass Bank, a unit of Spanish bank Banco Bilbao Vizcaya Argentaria SA, Mr. Buencamino obtained a $245,000 cash-out mortgage on the property. A homeowner using a cash-out mortgage refinances the home loan for more than the mortgage is currently worth and pockets the difference in cash.

A Compass Bank spokesman didn’t respond to requests for comment. Mr. Buencamino, who couldn’t be located for comment, has not responded to the charges.

A federal agent said he had been tracked to Vancouver, where the agent said he is applying for Canadian residency. Prosecutors involved in the case said he didn’t have an attorney on whom they could serve court papers. U.S. authorities said they were seeking his extradition.

“Fraud continues to be a pervasive issue, growing and escalating in complexity,” said an April report from LexisNexis’s Mortgage Asset Research Institute, which cited as reasons easy access to records via the Internet and, in many cases, though not Mr. Weaver’s, the vulnerability of cash-strapped homeowners.

MARI’s breakdown of the numbers reflects the shift in technique. Fraud related to falsified credit reports has declined each year since the boom years, MARI reports, while the share of mortgage fraud involving false appraisals jumped 50% between 2008 and 2009.

Application fraud—in which borrowers lie about their names, where they live, how much money they earn, their employment, their debt or their assets—remains high, accounting for 59% of all mortgage fraud.

One of the defendants in the New Jersey dragnet, a mortgage consultant with Newark-based Invest & Investors LLC named Viviane Bernardim, allegedly paid accomplices $15,000 apiece to steal the identities of several New Jersey residents who earned $90,000 or more and had good credit ratings. She used those identities to obtain second mortgages on a number of homes in the Newark area, according to U.S. Attorney Paul J. Fishman, head of the office prosecuting the case.

But since good credit ratings are no longer enough to get a mortgage, Ms. Bernardim also needed friends who worked for the lenders to pull off the caper.

“Having players at every level of a conspiracy makes it easier to carry out fraud,” said Mr. Fishman. “But each bad actor and criminal act is also another chance for law enforcement to find a way in.”

Maria Delgaizo Noto, an attorney for Ms. Bernardim, said that she had no comment until an indictment was unsealed, but that her client “maintains her innocence of any criminal activity.”

In Phoenix, Mr. Buencamino’s alleged fraud was assisted by an insider, but also by easy access to public documents on the Internet. After intercepting mail intended for Mr. Weaver and obtaining his Social Security number, Mr. Buencamino applied online for an Arizona driver’s license in Mr. Weaver’s name, according to the criminal complaint and law enforcement agents involved in the case.

When he received the permit, he submitted mortgage application documents by mail to Compass Bank and, with the help of co-conspirator William Baxaveneous, the Compass loan officer, obtained a second mortgage on Mr. Weaver’s home—which had no mortgage—without ever having to meet any bank officials face to face, Mr. Weaver said. He said he learned this from the federal agents investigating the case.

Mr. Baxaveneous’s attorney said he was trying to settle the case and declined to comment further.

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On Monday August 23, 2010, 4:26 pm

It’s been a while since I’ve sensed quite this much doom among the folks obsessed with housing (one told me simply, “You’re going to be very busy!”), but July existing home sales are unquestionably the product of a perfect storm:

1. The home buyer tax credit expired April 30th, and originally you had to close by June 30th. Yes, that closing deadline was extended, but the bulk of tax credit-inspired sales likely closed by the end of June; hence, the July hangover.
2. Renewed concerns about a double-dip recession and lackluster job growth have pushed confidence in the housing market lower.
3. Rock-bottom mortgage interest rates have done nothing to boost mortgage purchase applications in the past few months.
4. Foreclosures are taking a turn for the worse yet again.

I’ve said over and over that the anticipated drop of anywhere from 12 to 25 percent in July sales is not wholly a result of the end of the tax credit. But then I got to thinking about prices. Obviously a far slower sales pace pushes inventories, and specifically months supply of inventories, way up. Dan Oppenheim, over at Credit Suisse says, “We think months’ supply will jump sharply based on the lower sales pace, with total and single-family months’ supply likely nearing or surpassing 11 months, which was the prior record level seen in summer ‘08. This will create further near-term pricing pressure.”

But what about the fact that the first time buyers are out (mostly) of July’s numbers? “Their share is likely to drop into the mid or low 30’s in July, dragging existing home sales down to their lowest level since the present data series begins in 1999,” say the folks over at IHS Global Insight.

So if their share of total sales is so much lower, and first time buyers generally buy lower-priced homes, wouldn’t it be possible that, with a higher share of higher-priced homes selling, that would skew the median home price higher? Again, this would be an artificial skewing, not a real improvement in home prices, but some might not see the distinction.

I asked a few experts if my theory holds water:

From Mark Zandi at Economy.com: 
I expect median house prices to fall back closer to 170K, seasonally adjusted; the lowest since April 2009. This is based in part on the experience of the median house price decline in the wake of the last tax credit last fall. The much higher share of sales that are distressed during the month will trump the other mix effects. As you know, however, projecting month to month changes in the median price is an intrepid affair.

From Dan Oppenheim at Credit Suisse:

1. The mix may cause that. 2. Price pressure just started in May, so it would have only had a slight negative impact on the closings for July. Price pressure has intensified in more recent months. 3. Seasonal trend for July is slightly positive +0.4% over time, so that is another factor going in that direction.

In other words, stay tuned…

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Friday, August 20, 2010

Early retirement has become the American dream for many workers, especially those who are very successful at their jobs and have accumulated sufficient assets and tenure with their employers to do so. Other workers who stumble into early retirement come under rather less pleasant circumstances, such as those in their 50s who are laid off and unable to find other work. Those who have a choice and are contemplating this course of action should weigh the possible disadvantages carefully, as they can be substantial in many cases. Here are some of the drawbacks to early retirement.

Early Withdrawal Penalties

Those who withdraw funds from any tax-deferred account, such as a traditional or Roth IRA, employer-sponsored retirement plan or annuity contract before age 59.5, must generally pay through the nose to do so. Not only will they pay income tax on the amount withdrawn at ordinary income tax rates, they will also pay a 10% early withdrawal penalty on their distributions. Furthermore, they may be assessed additional early withdrawal penalties if they take funds out of a certificate of deposit or annuity contract, which generally has a declining sales charge surrender schedule.

For example, Clyde is 53 years old and is laid off from his job. He has no choice but to withdraw $20,000 from his traditional IRA to pay for living expenses. The IRA is invested in a fixed annuity contract and will charge a 4% penalty for any withdrawals made during the current year. Clyde will pay the 4% penalty, the 10% early withdrawal penalty plus income taxes on his withdrawal. If he is in the 25% tax bracket, then he will pay $5,000 in taxes on his withdrawal, plus a $2,000 early withdrawal penalty to the IRS and an additional $800 early withdrawal penalty to the annuity carrier. His total cost comes to $7,800 – nearly 40% of his withdrawal amount.

Of course, his tax bill may be reduced by various factors, depending upon his financial situation. He would also still pay tax at ordinary rates on his withdrawals, even if he were over 59.5. But the early withdrawal penalties are clearly substantial; in this case, they equal over one-eighth of the total amount of the distribution.

Loss of Control of Distributions

Those who wish to begin taking retirement plan distributions early can avoid early withdrawal penalties by taking a series of substantially equal periodic payments that meet the requirements of IRC section 72(t). This sets up a set annuity of payments from an IRA or qualified plan that will last from the time that they begin until the account is exhausted. However, this course of action is irrevocable, and payments must continue regardless of any future change in the circumstances of the recipient. This is the equivalent of choosing an annuity payout option, which also cannot be changed once it begins.

Less Money over a Longer Time Period

This is generally the greatest disadvantage of early retirement. Those who retire early must stretch their retirement funds out over a longer period of time. This also means that they have had less time to allow their funds to accumulate. The Rule of 72 dictates the amount of time that it takes for an amount of money to double at a given rate of growth; this can therefore mandate that those who retire 10 years early may only have about half as much in their retirement savings as those who retire at a later age.

For example, two employees of the same age work for the same company and allocate the funds in their retirement plans in guaranteed accounts paying 8%. One retires at age 55 and the other retires at age 64. Since the rule of 72 shows that money growing at 8% interest doubles every nine years, the employee who retires at age 64 will have twice the amount of money in his or her plan as the other employee. Just as importantly, this employee will have nine fewer non-working years for which he or she has to provide for him or herself and/or spouse.

The Bottom Line

Clearly, early retirement can substantially impact the quality of life that is lived during retirement, and can generally only be successfully accomplished by high-income employees and those who plan out their requirements with great care.

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