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The Retirement Trap

Traditionally, we are taught to work hard, save hard, pay off our mortgage, contribute the maximum to retirement accounts and plan on downsizing. Plus, word on the street is that you will be in a lower tax bracket when you retire (which under every tax code I know only means you have reduced your lifestyle). We aren’t alone. Our government is in the business of retirement planning as well — except it is smarter. The federal government holds all the cards, providing tax incentives for us to contribute to retirement plans, requiring us to hand over our money for someone else to use. We carry all the risk and pay all the penalties when we finally need to access our capital. It makes sense. Our country was founded on Capitalism, defined as “increasing cooperation amongst strangers.” Stocks: We give money to other people. They have our cash and we have all the risk. Bonds: We loan money to other people. They have our cash and we have all the risk. The borrower, not the investor in these financial vehicles, can make the situation better. The lender/investor must live with the borrower’s decision. Bank accounts: We give money to a bank. The bank has our cash and we have all the risk. But we get a consolation prize: a pittance in interest. Banks also charge us four times the amount when we need to get cash out of our homes, which for many is our only source of non-taxable money. Then, adding to the insanity, we again pay interest to the bank on our money. Now, here is where people get tripped up. What is your net worth? In the eyes of Wall Street, your net worth is quantified by how much money you have invested in financial products. But realistically, your net worth is a combination of human capital and investment capital. Your human capital is your knowledge and experience, which give you the tools you need to wake up every day to generate income and take care of your family. But as we go through life, we take the one thing we own and control and transfer it into risk capital. We retire, only to realize that everything we worked for is at risk. At a time when we desire safety and certainty, instead we are trapped in retirement accounts: 15-year loans that handcuff us to obligations that may cost twice as much to support coming from a retirement account. In the 1970s and ’80s, our parents or grandparents retired when interest rates were 10 percent; a million dollars meant one day you could live on an income of $100,000 a year. But interest rates don’t stay in one place. Waking up to find interest rates at four percent, people could no longer afford to visit their children on holidays. You have a retirement plan. But do you have a plan for managing your retirement?

Bad News Is Good News For Mortgage Interest Rates

Mortgage interest rates continue to hit new lows as the economy plods ahead slowly. Rates declined in reaction to disappointing job growth, according to a report released on July 6. The number of non-farm payroll jobs for June was up by 80,000. The consensus was 100,000 jobs. Some Wall Street firms raised their guidance to 125,000 after the release of a stronger ADP employment report the previous day. As the report confirms, the reason for this market reaction is the economy’s tepid recovery. Rates simply are unlikely to move higher with a slow moving economy. Additionally, the Federal Reserve Bank may be prompted to do some quantitative easing. The markets are already pricing in more stimulus by the Fed. Mortgage rates are at historic lows. Purchase mortgage rates 30-year fixed rate mortgages are priced in the mid-3 percent range. Fifteen-year fixed mortgages are below 3 percent. Rates for 5/1 and 7/1 adjustable rate mortgages are below 3 percent. For every 200,000 borrowed at 3.5 percent on a 30-year note, the payment is $895 a month. At 5 percent, the payment would be $1,069 a month. This represents a savings of $174 monthly. With the low interest rates, a borrower can get a larger loan than was the norm just a year ago. In order to get approved for a loan, a borrower needs debt to income ratios of around 40 percent. With historically low rates and home prices coming off their lows, the affordability index is excellent. Other monthly reports were less than upbeat. The manufacturing index went down to a reading of 49.7 percent, below the 50 percent threshold considered the equilibrium. Readings below 50 percent are considered bearish. A factor contributing to this decline is the worsening of the EU economies. Exports are important to the manufacturing sector. Goldman Sachs has reduced its target GDP for the Q2 GDP to 1.5 percent, one-tenth lower than their previous prediction. Will rates still go lower? There is always the possibility. If one of the EU states stumbles in the weeks and months ahead, more money could flee to the safety of bonds. This could spur even lower rates. Meanwhile, rates could tick higher, too. Locking in at today’s low rates seems like the prudent thing to do. Take advantage of the historically low rates and refinance, or consider buying that house or condominium. Bill Starrels lives in Georgetown. He is a mortgage loan expert specializing in refinance and purchase loans. Bill.starrels@gmail.com or 703-625-7355.

Relief for FHA Customers is on the Way

In the Feb. 21st Georgetowner, the newspaper ran its mortgage with the headline, “It Is Time For Refinance Relief for FHA Mortgage Loan Holders.” My article highlighted the problem Federal Housing Administration-backed mortgage homeowners were experiencing with their desire to refinance their mortgages because of the new, much higher mortgage insurance premiums that all but wiped out their interest rate savings. You never know who is reading the Georgetowner.  On March 6, President Barack Obama announced changes in fees charged to FHA-Insured borrowers. The following is the president’s statement released by the White House: Reducing Fees for FHA Borrowers Seeking to Refinance: As part of the president’s aggressive effort to reduce barriers and costs for refinancing, the administration is also announcing that the FHA will cut its fees for refinancing loans already insured by the FHA. An estimated 2 to 3 million borrowers could be eligible for this savings, providing the typical FHA borrower with the opportunity to save about a thousand dollars a year through refinancing than they could have under today’s fee structure. The president announced rule changes that do not require approval by Congress. Considering how productive this latest Congress has been, this is a good thing for homeowners. Borrowers with FHA-backed mortgages who use the FHA streamline refinancing program currently are being charged an upfront mortgage insurance premium of 1 percent of the loan balance and an additional 1.10 percent for an annualized premium.  FHA is lowering the upfront premium to .01 percent for streamlined refinances for loans originated before June 1, 2009, and the annual mortgage insurance premium is being reduced to .55 percent (which is what these mortgage holders are presently paying). As an enhancement, the government is removing streamlined loans from the tracking mechanism called the “compare ratio” that tracks lender performance. By relaxing the requirement on streamlined loans the folks at FHA are in essence encouraging lenders to do more streamlined loans. It will take some time for both FHA and the banks to update systems so the new FHA streamline rules can be implemented.  Expect the new streamline loan program to be available in a couple of months. The president’s latest initiative will provide significant savings for millions of current FHA mortgage holders. Many non-FHA mortgage loan customers with loans backed by Fannie Mae and Freddie Mac can presently refinance under the HARP2 program, otherwise know as the Making Homes Affordable (MHA) program.With the latest presidential initiatives, it is proving to be a great year to refinance a home mortgage loan. Bill Starrels is a mortgage loan officer who lives in Georgetown. He can be reached at 703-625-7355; email Bill.Starrels@gmail.com.

Bad News Is Good News

The employment report for the month of March released March 5, was as ugly as it gets. The consensus among economists was that around 200,000 new non-payroll jobs would be created. The number released was 88,000. Lipstick would not help this report. Not that much could be more troubling then the report; the numbers released on labor participation were equally unpleasant. Labor participation gages the percentage of potential workers that are actively looking for work. 500,000 people were estimated to have stopped looking for work. This is the largest one-month decline since December of 1979. This explains why the unemployment rate dropped to 7.6 percent If 500,000 workers had not stopped looking for work, the unemployment rate would have either stayed stagnant at 7.7 percent or even gone higher. It is not unusual in a growing job market to see the unemployment rate tick higher when the job market grows. This is because the available labor market gets larger when unemployed workers get more optimistic and start actively looking for work. This is one of the reasons this job report coupled with the labor participation numbers is troubling. Some economists are pointing to the payroll tax rise, not the sequester, as the catalyst for this job report. As part of the fiscal cliff deal in Congress earlier this year the Social Security payroll tax was allowed to revert back to 6.2 percent from the temporary level of 4.2 percent. This cost the average tax payer around $100 a month is income, which is less money a lot of consumers have to spend in the economy. Effects of the sequestration are about to come on stage. Workers affected by sequestration are typically having their overall hours and pay cut back by five or ten percent. These workers will have less discretionary money to spend which will be a further drag on the economy. Bad news can be good news for bonds, and ultimately mortgage interest rates. Before the jobs report, some economists and talking heads were debating when the Federal Reserve would take its foot off the accelerator, implying that this would happen sooner then what the was being stated. Well, the “experts” will have to find something to talk about on CNBC or on the internet. This report clearly reaffirms that the stimulus by the Federal Reserve, including keeping rates low is not going away anytime soon. The bond markets reflected this when 10-Year Treasury notes were trading at their lowest point since May of 2012. Mortgage rates are close to historic lows. The lower rates are hitting at the same time as the spring housing market is starting. This should keep activity active and is good for buyers who need mortgages. Bill Starrels lives in Georgetown he is a mortgage loan officer. He specializes in purchase and refinance mortgages. Bill can be reached at 703-625-7355, bill.starrels@gmail.com

Tax Time — It’s Either You or Your Uncle

Did you know that if you pay $10,000 in taxes this year it could easily amount to over $26,000 in wealth over 25 years? Far too often I see clients who unnecessarily give away money, both in taxes and lost earnings that could have earned them a sizeable rate of return over their lifetimes — and a sizeable fortune for many investors. As the end of the year approaches, now is the last chance for many to reduce their 2015 tax burden. Unfortunately, many investors focus on getting a one- or two-percent higher return on their portfolio or perfecting the target price on their stock while leaving the 20 to 30 percent of what they can control on the table for their accountant to handle. We all know we can’t control the markets, interest rates, the economy or numerous other life events that can wreak havoc on our portfolios. But what we can control is how many of our hard-earned dollars we give away each year to Uncle Sam — and our ability to control this typically diminishes as we age. There are many lists and articles out there extolling the top five things you can do to reduce taxes by year-end, such as maximizing retirement contributions, paying January’s mortgage payment in December, bunching medical deductions in one year and tax-loss harvesting. But here are a few other suggestions that may be new to you. • If you have inherited a Roth IRA or an IRA and you don’t take a required minimum distribution like those individuals over 70, you will be subject to a 50-percent penalty. • Medical expense deductions have risen to 10 percent of your adjusted gross income versus 7.5 percent for certain income groups (other than retirees). • If you are a military family, you are eligible to put your Servicemembers Group Life Insurance benefits in a Roth IRA. • If you have lost a family member who was receiving a federal government pension, your unrecovered after-tax contributions are deductible in the year of death. This is a huge benefit commonly overlooked, especially in our community. • If you have made a statement of charitable intent or a promised future gift, consider setting up a charitable gift fund in a high-income year, even though the gift can be made over time. • Finally, beware of the hidden tax inside your mutual funds. In a volatile year like 2015, many investors will see their portfolio lose value, then wake up April 15 to a surprise: a tax liability. “The hardest thing to understand is the income tax,” said Albert Einstein. About this, and so many other things, he was right. So this holiday season, take a few minutes to seek out the help of a professional — or go online and look up “overlooked tax mistakes.” Because once it’s gone, it’s gone. Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

Mortgage:Bad News Is Good News

Bad news for stocks can be good news for mortgage rates. Spurred by slower growth in China and unease in emerging markets, the stock market has been in a correction mode. When the stock markets tank, bond markets are often one of the safe-havens. Ten-Year Treasury notes closely mirror movement in the mortgage backed securities markets and often sends mortgage rates lower. This has translated into good news for mortgage interest rates. Current mortgage interest rates are at the lowest they have been for a few months. The trend appears to be that rates are drifting even lower. If a borrower has locked in a loan over the last several weeks and the loan is not closing immediately, they should go back to their lender and ask if they have a price renegotiation policy. Most banks do have a policy which allows a one-time rate change. It doesn’t cost anything to ask. In recent weeks Ten-Year Treasury notes reached a high of 3%. Currently Ten-Year Treasury notes are around 2.72%, a drop of over twenty-five basis points in the first part of the year. This is a large move. The new Dodd-Frank rules have kicked in for the banking industry. These rules have put further limits on the institutions and how they must qualify a borrower for a mortgage. No one seemed to think the rules were easy in 2013, and now the new rules are tougher. Ratios have been contracted to a total allowable debt ratio of 43%. Credit lines now must be counted against a borrower even if they are untouched. A lot of homeowners do have lines of credit which have no balances which may be a determent to their ability to refinance or buy a second home. The Dodd-Frank rules pose a downside risk for the housing market. If these regulations restrict the supply of credit, some households looking to purchase a home could find themselves shut out of the market, which would weaken demand. A lot of observers think the Dodd-Frank rules may slow the recovery in the housing sector. Time will tell if the current downturn in the equities markets persists or moves to the sidelines. If it becomes sustained for a period of time, it will tamp down economic growth prospects for 2014. This would potentially help keep mortgages lower. One of the most important reports around the corner is the employment report on February 7. Most expect a strong report in January and revised (higher) numbers for December. The report will be the foundation for the near term. Bill Starrels lives in Georgetown. He specializes in residential mortgages. He can be reached at 703-625- 7355 or bill.starrels@gmail.com NMLS#485021

Mortgage Interest Rates Defy Most Experts

The mortgage market is defying almost all economists’ short-term forecasts. Most expected bond yields and mortgage yields to be on the rise in 2014. This has not been the case. The 10-year Treasury yield hit its high-water mark at 3.03% on Jan. 2. At the end of May, it was at 2.46%, very close to a low for the year. These numbers basically caught all by surprise. Interest rates with no points on 30-year fixed-rate mortgages have been hovering around 4% on purchase-money conventional loans. Rates have been in the high 3s on government-backed 30-year fixed-rate FHA loans. On 15-year fixed-rate purchase loans, rates recently have been close to 3% with no points. Rates on adjustable-rate mortgages are also quite low. On a 5/1 ARM, with the loan fixed for the first five years, the rates are in the high 1s with no points. Also important is the LIBOR index. The London Interbank Offered Rate is defined as the benchmark rate that some of the world’s leading banks charge each other for short-term loans. The LIBOR index is used by most of today’s adjustable-rate mortgages. When an adjustable-rate mortgage is reset, the margin (usually 2.25%) is added to the index value; this determines the new rate going forward. As of the end of May, the one-year LIBOR index was 0.549. The new rate is: 2.25 + 0.549 = 2.799%. This is why folks with adjustable-rate mortgages are happy these days. In June 2012, there were criminal settlements against major European banks in connection with a LIBOR rate-fixing scheme that propped up the LIBOR index. The U.K. invoked the Financial Services Act of 2012, which brought the setting of LIBOR rates under U.K. regulatory oversight. The scandal has made it nearly impossible to track good historic data on the LIBOR index because normal market forces were not at work. One of the catalysts for the currently low bond yields is weakness in the eurozone economy, with further stimulus announced by the German Central Bank. Another is the revised fourth-quarter GDP, which showed negative growth for the first time since 2011. It is hard to predict where bond yields and mortgage rates are headed in the near term. One thing is certain: current rates are very attractive for folks looking to purchase or refinance a home. Bill Starrels lives in Georgetown. He specializes in refinance and purchase mortgages (NMLS #48502). He can be reached at 703-625-7355 or bill.starrels@gmail.com.

Where Is Common Sense Underwriting?

2011 was quite the year in the mortgage industry. Underwriting standards got even tougher even for the most qualified consumers. The mortgage industry has gone from one bad extreme to another. Before the housing and financial crisis hit, there was little quality control. If a potential customer was alive, had a social security number, one could get a mortgage. Income did not have to be verified, and sometimes assets didn’t have to be verified either. Basic standards had to be improved. There are four major components needed to qualify for a mortgage. First, sufficient income is needed to obtain good ratios. A customer had to have a mortgage that requires no more than 40 percent of one’s income. Second is good credit. Third is decent equity, which means a decent loan to value (LTV). Fourth are adequate assets. What is happening in today’s over-regulated mortgage environment are underwriting and auditing standards which are out of control. One can have perfect credit, strong income and assets a low LTV, and your loan will still be scrutinized for the most minor of details. Virtually all of your non-payroll deposits will require letters of explanation. If you make the “mistake” of depositing that $200 reimbursement check from your son for concert tickets you will have to write a “letter of explanation” as to where the $200 came from. If you received $400 for some side job, you have to write a letter of explanation. You get the idea. Why is this required? Good question. If you have any credit inquiries on your credit report, you will have to write a letter of explanation. The best advice is to plan ahead of time. Avoid non-payroll deposits for 60 days leading up to your mortgage application. Do not apply for any additional credit up to and during the mortgage process, your credit will be checked prior to approval. The days of common sense underwriting are over for mortgages. Will common sense underwriting standards come back one day? Hopefully. It’s going to take some thoughtful lobbying from consumers and bank executives alike. Today’s standards are simply inappropriately tough. Bill Starrels lives in Georgetown and is a mortgage loan officer who specializes in residential refinance and purchase mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com .

Hitting Delete on Social Security Provisions

The Social Security Handbook has 2,728 separate rules governing benefits. But that’s just the handbook. The Social Security Administration operating system has thousands more rules and interpretations, putting to shame the 72,000 pages often cited by political candidates about the Internal Revenue Code. It’s no wonder that most retirees give up between 20 and 30 percent of the benefits they are entitled to; the rules and guidelines are overwhelming. And it’s no wonder that nearly half of all retirees accept a reduction of between 20 and 25 percent of their full retirement benefit and forgo a whopping 32 percent increase in income by not waiting until age 70. With help it is extremely difficult to get it right — but getting it right on your own is nearly impossible. A 62-year-old couple has over 100 million combinations of months for each of the two spouses to take retirement benefits, take spousal benefits and decide whether or not to file or suspend retirement benefits. For couples with significant age differences the number of combinations can be even more daunting. It was just a few years ago that the financial industry doled out advice and recommendations based on a simple, unsophisticated break-even calculation. But ever since a retired SSA employee began writing a weekly column, the general public and the financial services industry have begun to understand what in the past only the rule makers understood. The result of these revelations is that many of the strategies that have been brought to light have become Congress’s most recent victims. The last major change was during the Reagan Administration, when, in an effort to stem the tide of budget deficits, a bipartisan solution was devised to tax retiree benefits instead of cutting them. This achieved the same result in a more politically expedient manner than an outright reduction. Now, unlike an IRA that one contributes to before taxes and pays taxes on later, we have to pay taxes both going in and coming out. In a provision labeled “closure of unintended loopholes,” the recent budget compromise eliminates two popular claiming strategies for those born after January 1, 1954: file and suspend; and filing for a restricted claim of spousal benefits. For many couples, this strategy translates to a six-figure windfall. For anyone born after 1954, you just lost a great benefit. The cold hard truth about government money is that you don’t own it and you cannot control it. But for those of you eligible for Social Security, you should do your homework. For everyone else, Congress still has 2,728 rules and hundreds of thousands of provisions that it can simply hit the delete key on to solve their problems. Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

Points in Our Favor: 2015 Mortgage Rates Looking Good

When it comes to predicting mortgage interest rates, during certain years economists are the smartest persons in the room. 2014 was not one of those years. In 2014, economists theorized that when the Federal Reserve stopped its program of buying longer-term treasuries and mortgage-backed securities, rates would rise. Freddie Mac’s deputy chief economist Len Kiefer said that he expected the average rate to rise to 5.1 percent by the end of 2014. Later in 2014, he pulled back his prediction to 4.3 percent. This prediction was still too high. For 2015, Freddie Mac’s chief economist Frank E. Nothaft – who is also a lecturer at Georgetown University – said he expects to see interest rates climb throughout 2015, averaging about 2.9 percent for 10-year treasuries and 4.6 percent for 30-year mortgages. Some economic forecasters think the Fed’s board of governors will not raise rates in 2015. Their rationale is that the euro, which is racing toward parity with the strengthening dollar, is making U.S. goods expensive for our trading partners. If the Fed raises rates, the dollar would get even stronger, harming the U.S. economy. Because of this and other factors, it seems unlikely that rates will be raised in 2015. Local real estate has benefited from the strengthening economy and low interest rates. When asked for some highlights of the Georgetown real estate market, Michael Brennan Jr. of the Georgetown office of TTR Sotheby’s said, “One of the most remarkable events in Georgetown real estate in 2014 was the rollout of 1055 High. In just seven days’ time, all seven units sold, all cash, all over list price.” Looking at the start of 2015, Brennan said that, as of early February, “There are only three houses listed for sale in Georgetown below $2 million. With available inventory this low, buyer demand will remain strong for our neighborhood in 2015.” The most notable listing so far – the Fillmore School building and property – was just listed by TTR Sotheby’s for $14 million. Clearly, Georgetown continues to be one of the hottest addresses in Washington and in the county. A well-balanced community with strong residential, business, restaurant and workspace components, it also continues to be one of the safest neighborhoods in D.C. With mortgage interest rates flirting with two-year lows, the affordability index is at one of its highest points ever. It looks like 2015 will be an excellent year for real estate and mortgage rates. Bill Starrels lives in Georgetown and is a mortgage banker specializing in residential purchase and refinance mortgages (NMLS#485021). Reach him at 703-625-7355.