Wall Street’s Double or Nothing

The odds of Leicester City Football Club winning the Premier League were 5,000 to one. If you had bet your entire retirement on Leicester, your retirement date just moved up by about 50 years. The S&P 500 Index is now officially in the second-longest bull market run in history. That sounds great … until you remember that it was immediately preceded in 2008 by the second-worst financial catastrophe in history. In less than a year, the S&P 500 lost half its total market capitalization, roughly $7 trillion. Over the past seven years, from the 2009 bottom to recent levels, the index roughly tripled. But if you had long-term investments eight years ago and rode the roller coaster down and back up again, your compound annual rate from 2007 until now drops to less than four percent. Although the S&P looks like a sure first-place winner, the odds are that this horse may be running out of steam. When rebalancing your portfolio, it’s important to understand the difference between compound interest and average return. Ignore the past-performance charts that show a three-, five- and 10-year average return; they are meaningless in building wealth. Stocks and bonds go up and down; only fixed vehicles compound. Here’s how Wall Street’s double or nothing game works: A stock worth $100,000 that gained 100 percent in year one would grow to $200,000. However, if it lost 50 percent the second year, it would be worth $100,000. Your statement would reflect a 25-percent average return while your actual compound return was zero. Let’s look at it a different way. In 2011, the average annual appreciation for the Dow Jones Industrials from 1900 to 2010 was 7.1 percent (which is how the Dow reports). So if one took a simple calculator and calculated what $1,000 invested over 110 years at an average of 7.1 percent would be, the number turns out to be $1,891,654. However, the Dow rose from 66 in 1900 to 11,578 in 2010, which reflects an actual compounded return of only 4.8 percent. Applying the same math example, the actual return of $1,000 invested in the Dow was only $156,363. That’s an error of $1,735,291. Now that’s a lot of retirement money. The problem is, calculators and financial programs project future values using compound math and the investing public believes the numbers. The house is winning and we are losing. If you make that mistake, the only way to make up for it is to bet on Leicester winning. John E. Girouard, CFP, ChFC, CLU, CFS, author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

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.

Touting Local Lending, EagleBank Hits Mortgage Milestone

This September, EagleBank passed a milestone of $1 billion in mortgages. With 17 branches in the Washington metropolitan area and the bank’s 18th on the way in January, EagleBank is showing serious strength as the largest community bank in the Washington metropolitan area. The Georgetowner discussed this milestone with EagleBank chairman Ronald Paul. Paul was a founding board member of EagleBank. It was founded in Bethesda, Md., in 1998. “We’re the largest community bank in the metropolitan area based on deposits,” Paul said. Investing in the community is important to Paul. “We’ve been active in staying local,” he said. “And, to me, that’s an important part about business. That’s what’s going to support our economy.” “We promoted a bill [which calls for local governments to switch deposits from national to local banks] in Montgomery County, and we have one proposed in the District,” Paul said. “For every dollar the District government deposits in EagleBank, we’ll match it with two dollars in lending in that marketplace. We’re working with Jack Evans in the District for it.” “You know, we put money into a restaurant in Bethesda that hired 68 employees, in which a third of those were unemployed,” Paul said. “So, obviously the big banks are not going to do that. That’s why Eagle has been as successful as it is. If it weren’t for a community bank like EagleBank, that restaurant would probably have never opened. Those 30 people might still be unemployed. And that’s why it’s so important for us to be supporting these community banks.”

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 .

April 18: Lucky Day for Scammers?

Just imagine robbing a bank on the one day that millions of people have made a deposit amounting to billions of dollars. April 18, or Tax Day 2016, is that one day this year for a certain type of scammer. A particularly pernicious form of fraud, tax-related identity theft is when someone uses sensitive personal information (such as your Social Security number) and files a fraudulent tax return in your name to collect a refund. According to recent statistics, scammers filed more than five million returns in 2013 using stolen information, costing the IRS $5.8 billion in fraudulent refunds. Most victims don’t realize that anything is amiss until they file, only to be notified that a return has already been filed in their name. I’ve experienced this firsthand. Last year, someone filed a fake tax return under my Social Security number. At first glance, I was hoping someone was generous enough to pay my taxes for me — my lucky day! But by no fault of my own, the outcome is much more cumbersome. I can no longer file a tax return electronically. I had to actually, physically, go down to the IRS office just to get a copy of my transcript to refinance my mortgage. My identity, like that of millions of Americans, was compromised by scammers seeking to defraud Uncle Sam. And there are plenty of scammers out there. Recent reports indicate that more than 900,000 people received phone calls, seemingly from the IRS, asking them to verify their bank account number for their refund or demanding payment. Nearly 4,550 victims have collectively paid over $23 million as a result of this scam. Scammers have made Tax Day go from unpleasant to nightmarish. Now, not only do we have to write a check, but we also have to worry about who else, besides the government, could be reaching into our wallets. To decrease the chances that you too will be scammed, follow these simple steps: • The federal government will never call you demanding payment on taxes owed. (They are far more likely to send a guy in a nice leather jacket with a set of handcuffs.) Never give your personal information, including your Social Security number and date of birth, to anyone over the phone. • Get a shredding machine and make sure that your devices — laptops, cellphones, etc. — have encryption tools to protect your account numbers and other personal information. • Seek out a financial professional who can properly calculate what you owe in taxes and suggest ways to reduce your payment and avoid a large refund, which can attract scammers. Don’t let April 18 get you down. Remember: Tax Freedom Day — the day when the average American stops earning money to pay taxes and starts earning money for him- or herself — is right around the corner, on April 24. *John E. Girouard, author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” 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.

Not Out of the Woods YetMay 2, 2012

The real estate market and mortgage rates have come together, forming a perfect time to be buying a home in Georgetown or in greater D.C. The nation?s economy is still recovering from the recession of a few years ago. If one remembers, the housing sector crashed, which was one of the catalysts for the collapse of Wall Street. Credit came to a halt and the Federal Reserve Board of Governors slashed interest rates in an effort to keep the economy from going into a depression. As a result, house prices collapsed in many markets (including some outlying areas of the Washington metropolitan area). Interest rates fell and continue to drift lower. Overall, the housing markets are showing some signs of recovery nation-wide, but the Fed?s statement warned that the housing sector still remains depressed. The D.C. market remains more stable then most. In the Federal Reserve Board?s most recent meeting in late April, the Fed did not deviate from its more recent statements on the outlook for the economy. The Fed is holding firm on interest rates. According to Merrill Lynch, the markets are not looking for any rate hikes until May 2014 at the earliest. Typically predictions longer than 24 months out are very rare and very hard to forecast. Mortgage rates continue to flirt with historic lows. As we close out the month of April, 30-year purchase mortgage rates ranges in the Freddie Mac Survey showed 30-year fixed rate money averaging 3.8 percent with 0.7 of a point, and 15-year money averaging 3.18 percent with 0.6 of a point. Conforming money is for loan amounts up to $417,000. High conforming purchase money (up to $629,000 for conforming money and $729,000 on FHA money) rates are higher. Jumbo money rates are still higher. Rates on ARMs (adjustable rate money) are around 3 percent or lower. If one is buying a home with firm plans to move in the next four or five years, an ARM can be an attractive option. With house prices close to historic lows, and mortgage rates close to historic lows, it is a perfect time to look at buying a house. The cost of housing is very attractive. Housing prices are likely to go higher in the future. In order to get approved, a customer has to be able to show income documentation and source of funds. Low documentation loans are not available. With decent credit, some cash for a down payment (3.5 percent down for an FHA loan to $729,000) one can take advantage of today?s perfect storm. ***Bill Starrels is a mortgage loan officer who lives in Georgetown. He specializes in purchase and refinance mortgages. He can be called at 703-625-7355, email, bill.starrels@gmail.com***

The State of Mortgages

  -Mortgage rates remain in a narrow and favorable range. In recent days, rates for 30-year fixed-rate mortgages as gauged by Freddie Mac averaged below 5% percent again. This means for a primary house mortgage with at least 20 percent down and very good credit, rates are quite attractive. Interest rates on government insured FHA and VA mortgages were slightly higher. Fifteen-year mortgage rates typically carry rates that are around a half to three-eighths lower then typical 30-year rates. Interest rates on adjustable rate mortgages that have fixed terms of three, five and seven years were approaching a rate of 4 percent. The turmoil in the European markets produced instability in stock markets worldwide. When stock markets falter, investors put money into safer investments, which include the bond market. When bonds do well, so do interest rates. The yield on the 10-Year Treasuries was testing the 4 percent level before the turmoil in the stock markets. The yield for 10-Year Treasuries is now in the 3.5 percent range. The “flight to safety” should continue for at least the short term. Inflation or the fear of inflation is the major driving force for a rise in interest rates. There is little fear of inflation, nationally or globally. Some economists state that the long-term trend in inflation globally is titled in the direction of less inflation or even deflation. In the short term, there is no doubt that inflation is well under control and there is no fear of inflation rearing its head. If the European Union slides towards recession, then there will be no chance of interest rate rises by the Federal Reserve in the foreseeable future. Employment is starting the long road back to recovery. Jobs are starting to increase. However, more people are coming back into the job market, looking for jobs. That is why the unemployment rate rose to 9.9 percent, even though there was healthy job growth. There is a lot of work yet to be done. Underwriting standards remain strict. This means a loan has to be well documented with all the income and asset statements. If there is a gray area on a loan, the underwriter will cast doubt instead of giving the benefit of the situation. Mortgage loans are available, but the client has to be well qualified. If you are in the market for a mortgage, this can be a good time for you. Rates are low and as long as you can meet the underwriting criteria, you should end up with an excellent mortgage. Bill Starrels lives in Georgetown, specializing in residential mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com.

The Difficulties for the Self-Employed Borrower

As all of us are aware by now, after the largest housing bust since the great depression, getting a mortgage is far from the pre-bubble days where just filling out an application gave you an over 70% chance of getting a loan if you had good credit. Everything you can think of involving your financial picture now needs to be disclosed and reviewed by a lender. For those of you that are self-employed or own your own business, getting a loan can be even more toilsome. Pre-housing bubble days allowed the "self-employed" to just state their income and put a decent amount down in cash. We, the lenders, just focused on the borrowers' credit scores, the value of the property, and in most cases savings in the bank. As the housing market nationally started to crash, so did more of these stated income loans, referred to these days as "liar loans." Not all self-employed borrowers that used stated income loans were lying about their income, but since the program was abused it went "pop" with the bubble. Here is what you need to know about getting approved as a self-employed borrower: 1) You must have a 2-year history of being self-employed with reported 1040s to qualify for a mortgage. There are some exceptions, so e-mail me if you have any questions. 2) Lenders are looking for several months of "cash reserves," which are total mortgage payments in liquid assets. Many mortgage programs, especially if the loans are over the Fannie Mae/Freddie Mac loan limits, are looking for as little as 6 months or up to 12 months of cash reserves, depending on the loan size and down payment. 3) Lenders are now using income reported to the IRS as taxable income to qualify for a loan. If you are writing-off a lot of deductions then you are going to have a harder time qualifying for a loan. You have to be more conservative in your business deductions, which is hard in this economic climate. Bottom line: pay more in taxes to qualify for a larger loan. 4) Declining income is a red flag for an underwriter. If your business is still reeling from the economic tsunami of 2009, getting a loan can be even more difficult. Lenders will only use the lower of the two years of income to qualify you if, for example, 2010's income is lower than 2009's. We can make exceptions for declining income for a health issue or call to active duty, for example. 5) The higher your credit scores are, the better chance you have of getting a higher loan and qualifying for more. Reducing credit card debt is one of the easiest ways to improve your credit score, since credit card debt has an immediate impact on your score. Work with a credit repair company to get rid of any inaccurate information and make sure you check your credit scores regularly. Gregg Busch is Vice President of First Savings Mortgage Corporation. For more information or a free pre-approval contact him at GBusch@FSavings.com or 202-256-7777.

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.