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So why did the subprime mess occur? Because many people were overstating their incomes to qualify for mortgages that they couldn’t afford. And how did they get away with this? Because many lenders didn’t bother to verify the borrowers’ income when they could have easily done so.
While many in the lending industry have stated that they were duped by fraud, it turns out that most suffered from their own complacency. According to this New York Times article, A Road Not Taken by Lenders, at least 90% of the borrowers had to sign an IRS Form 4506T, allowing the lenders to verify the income of the borrowers with the Internal Revenue Service, but many lenders did not bother to check, even for stated income loans where the borrower did not have to provide any documentation proving income—hence, the alias for stated income loans, liar loans.
Lenders gave 2 reasons for not submitting the 4506T form: too costly and too time-consuming. The verification cost $20 and takes about 1 business day, so the lenders’ reasons aren’t credible. Why wouldn’t a lender spend $20—a cost that would be passed to the borrower anyway—to secure a loan in the hundreds of thousands of dollars?
Because the lenders intended to sell the loans—and the risk of default—to investment banks to securitize and sell to investors in the form of mortgage-backed securities, CDOs, and SIVs. Meanwhile the lenders make money from upfront fees, such as loan origination fees, points, and servicing fees, and the more loans they make, the more money they make.
It seems that condo hotels are a lousy investment, at least for now, for those people who bought at the top of the real estate bubble. Hotels are a risky business because occupancy rates depends on the economy, weather, and competition. Condo hotels allowed developers to transfer some of their risk to investors of the condo units, which may have caused the developers to build more than they would have otherwise, adding too much capacity for an area.
Some investors are saying that the hotel keeps more of the rental money than they should. Other investors are arguing that since condo hotels were primarily an investment, they should have been registered with the SEC as securities, which would make it easier for investors to recoup some of their losses. If the investors could prove that the condo hotels should have been registered as securities, then they would be entitled to get their money back without having to prove fraud or misrepresentation. However, most developers did not promote the condo hotels as an investment, thereby obviating the need for SEC registration, and defeating those investors who are suing to assert otherwise. Some are complaining to the SEC, but the SEC won't take any action unless the developer enticed buyers with projected incomes or occupancy rates.
Condo-Hotel Buyers See Investments Sour
Fair Isaac has altered its FICO scoring model, calling it FICO 08, to hopefully better predict consumer defaults. FICO 08 will continue to have a range 350 - 800, and it will still rely heavily on the amount of debt and payment history. However, FICO 08 will no longer use authorized user accounts in calculating the score. More positive weight will be given to users who have multiple types of credit, such as auto loans and mortgages, in addition to credit card history, while the debt-to-credit ratio—the total debt compared to a user's total credit line—will be given greater weighting—a higher debt-to-credit ratio will have a more negative effect that it did in the classical FICO scoring model. Numerous late payments will also have a more negative impact, while an occasional late payment will have less impact than in Classic FICO. FICO 08 scores should start appearing in the 2nd quarter of 2008. Experian and TransUnion will be using the scoring system, but it is uncertain at this time whether Equifax will be using it.
Part of the cause of the real estate bubble and the subprime debacle has been overinflated home appraisals. Many lenders were using their own appraisal units, or subsidiaries or affiliated companies, to appraise properties at higher-than-market values to get loans approved. In the past, lenders would have been concerned about the risks, but, nowadays, with most mortgages being resold as mortgage-backed securities, the risks were being transferred to investors, which lessened the lenders’ concern about risks and increased their focus on profits.
Starting in January, 2009, Fannie Mae and Freddie Mac, the largest buyers of mortgages that are securitized into mortgage-backed securities, will require that lenders use independent real estate appraisers. Also, real estate agents and mortgage brokers will not be allowed to select the appraiser.
Fannie Mae and Freddie Mac are creating an Independent Valuation Protection Institute that will promulgate rules to enforce independent and reliable appraisals, and will accept complaints from both consumers and appraisers as a way to monitor enforcement of the rules by the Office of Federal Housing Enterprise Oversight, the government regulator that oversees Fannie Mae and Freddie Mac.
Home Appraisal Standards Stiffened
The article below details the raising of interest rates on credit cards substantially, in many cases, to more than 25% by Bank of America, even for consumers who paid on time and whose credit score has not changed.
This underscores several important points about getting into deep credit card debt.
These considerations also underscore why you should have a savings account for financial emergencies rather than depending on credit cards, because you never know when your limits will be reduced.
A Credit Card You Want to Toss
A new law has been passed that for any renegotiated mortgage or for a foreclosure, any forgiven debt will not be taxable. The law applies to transactions that take place from January 1, 2007 to December 31, 2009. This law applies only to recourse loans—there is no forgiven debt for nonrecourse loans, because the lender must settle for what the property sells for, and cannot go after the borrower for any deficiency.
However, any forgiven debt, also known as cancellation of debt income, will reduce the homeowner’s basis in the property, which will add to any gain by the amount that is forgiven, when the home is sold. The borrower will still have to pay taxes on this capital gain, but it will be at the lower capital gains rate of 5% or 15%, depending on the borrower’s income rather than the usually higher ordinary tax rate on ordinary income that applied to cancelled debt.
There are some limitations to the tax forgiveness. There is a $2 million dollar limit of COD income that can be forgiven, and the law applies only to a principal residence—not vacation homes or investment properties. The exclusion also does not apply if the homeowner refinanced the mortgage, but the money was not used to improve the property.
Although a homeowner does not receive any money when a lender forecloses on the home, the IRS still treats it as a sale for tax purposes, and the homeowner must pay a capital gains tax on this so-called phantom income, if the sale price is greater than the homeowner's basis in the property. However, if the homeowner lived at least 2 years in the previous 5 years in the home, then he will be eligible for the home sale exclusion rule that exempts the 1st $250,000 of gains ($500,000 for a joint filers) from taxes, which also applies to the phantom income of a foreclosure. A borrower can also avoid paying taxes on the gain if he is insolvent—unable to pay his bills, which generally applies to most people whose homes are foreclosed.
A borrower has a mortgage of $120,000, an adjusted basis in the property of $40,000, and an income that qualifies him for the 5% capital gains rate. Later, on January 3, 2007, the property is foreclosed by the lender. The fair market value of the home is $100,000.
The lender sells the property for $100,000. Because it is a nonrecourse loan, the lender is only entitled to the sale price. The lender has no legal right to get the deficiency of $20,000 from the borrower. But the borrower must pay a capital gains tax of 5% on the $60,000 profit—the difference between the fair market value of the home and the borrower's basis—which equals $3,000, even though the borrower does not receive any of the money.
With a recourse loan, the lender is entitled to the $20,000 deficiency from the borrower, but decides to forgive the debt, since the borrower has no assets to pay off the deficiency. Previously, the borrower would have had to pay ordinary income tax on this cancellation of debt income of $20,000 in addition to the capital gains of the foreclosure, even though the borrower does not receive any of the income. With the Mortgage Debt Foregiveness Act, he won't have to pay any tax on the forgiven $20,000 debt, but will still have to pay the capital gains tax on the $60,000 of phantom income.
If the borrower can show that he was insolvent—unable to pay his bills—or that he lived in the home as his principal residence for at least 2 of the previous 5 years, then he will not owe taxes on the capital gain, even in a foreclosure, and whether the loan was a recourse or nonrecourse loan. Note that, without the Mortgage Debt Forgiveness Act, taxes would apply to any forgiven debt, even when the capital gains would be excluded by the Home Sale Exclusion Rule. However, the borrower could still avoid paying the tax if he can show that he is insolvent.
Here is a great new for-sale-by-owner site, Choice A, for selling your real estate. It is free to list your property, and is very simple to use. If you are looking for property, you can select an area by either city-state or by zip code. However, because this site only recently went live, most of the properties are restricted to Portland, Oregon and Seattle, Washington, but I'm sure that it will expand rapidly. It is easy to survey properties by thumbnails, map, or by a tabular list that can be sorted in numerous ways, such as by price or zip code. I'm sure there will be many more features in the future, but this is a great site right from the get-go. Below are some annotated screenshot snippets that provide more detailed features of the site.
Credit cards sock late payers with default rates of 30% or more
It has oft been said that the reason credit card companies raise interest rates for the slightest delinquency is because of the increased risk. It does make sense to charge people with lower credit scores a higher interest rate when the customer is acquired—higher risk does require a greater yield—but once the customer has been acquired, does it make sense to charge the maximum default rates of 30% or higher, even if someone is only a little late on 1 payment? And if someone is paying late because they have run into financial trouble, jacking up the interest rate to usurious levels would seem to increase the odds of not getting paid at all.
I think the real reason that credit card companies do this is because they can. When people are unable to pay off their credit card debt, even if they are paying their bills regularly, I believe that credit card companies see this as an opportunity to take advantage of such people to reap enormous returns. Otherwise, a better method of reducing risk would be to not allow the customer to make any more charges until the debt has been reduced significantly, or, if the credit card company truly believed that the customer was a real risk, to cancel the account, but allow the customer to continue making payments, using the original interest rate, so that the customer will be able to pay off the account eventually. Cardholders with little debt are rarely charged such rates even if they are late because they could easily pay off the debt and cancel the credit account, which is a risk that most companies don't want to take, considering how much they spend to acquire accounts. This is why people with a heavy debt load get socked with usurious interest rates even if they pay regularly, and customers with little debt don't. So don't go into heavy debt, and let lenders take advantage of you. Besides, lower debt increases your credit score and is simply more prudent.
To help the consumer, the Federal Reserve is proposing a requirement that a 45-day notice of a rate hike be given to the consumer, with the option to cancel the account and pay off the debt at the original interest rate.
A recently introduced Stop Unfair Practices in Credit Cards Act would limit penalty rate hikes to 7% and could only be applied to future credit, not to past balances. The Act would also eliminate the exorbitant fees that card companies charge to pay quickly, and that payments be applied to balances with the highest rates 1st.
Evidently, not too much, according to the Bloomsberg article hyperlinked below. It's to be expected, I suppose, when you consider that the state insurance commissioners generally come from the insurance industry, and return to good jobs there. Furthermore, the National Association of Insurance Commissioners helps the states in writing the insurance laws. And since, according to the article, insurance companies sometimes pay for the foreign travel of state insurance commissioners, the insurance companies must be getting favors in return. That's generally how these things work: I'll rub your back, you rub mine. One may also wonder why state insurance commissioners would need to travel to other countries? A few "reasons" given in this article were that insurance companies need to expand overseas, and that the commissioners were trying to help some foreign governments to set up their own regulatory authority. There is no explanation as to how a state commissioner is going to be able help insurance companies expand overseas, or why the foreign governments who want help in setting up a regulatory authority for insurance in their countries do not pay the travel expenses of the people who are helping them? The other unknown about all of this is why doesn't the federal government regulate insurance companies, since most of the them conduct interstate commerce? A tremendous benefit to federal regulation would be the elimination of a lot of red tape and legal expenses that are no doubt generated by a patchwork of 50 state laws? The United States Supreme Court did rule, in 1944, that insurance was interstate commerce and was within federal jurisdiction. Then the following year, Congress passed the McCarran-Ferguson Act, which returned regulation to the states, with some federal oversight to monitor whether it is all working properly. Now, some members of Congress are, again, contemplating federal rule, but whether it will go anywhere or be any better remains to be seen.
Bribed Regulators Deceiving FBI Over Payoffs Roil U.S. Insurance Customers
If Only Illinois Citizens Could Have Lawmakers' Insurers-Paid Stadium Perk
Researchers have noted that, in the 1990’s, companies that bought back their stock outperformed the market for up to 4 years after the announcement of the buyback program. The most significant reason for this increase is that managers buy back stock when they believe that it is significantly undervalued, and, of course, buying back the stock increases its demand and therefore its price.
However, a recent study by Standard & Poor seems to contradict this commonsensical notion. They found that 320 out of the 423 companies in the S&P Index that repurchased its shares between January 1, 2006 to June 30, 2007 would have done better by taking the money and investing it in an index fund benchmarked to the S&P 500.
The conclusion is that, while most managers don’t try to mislead investors, many buyback programs do not specify how many shares will be repurchased nor the time of their repurchase, and, often, the buybacks don’t occur—and sometimes, the stock buyback program can be bogus, announced to increase the stock price at least temporarily!
The study has found that those managers that heavily use discretionary accruals—which are revenue or expense items that managers have large discretion in deciding when they will appear in the company’s financial statements, and what their value will be—generally perform worse than companies using less discretionary accruals. Managers using discretionary accruals aggressively can only bolster the share price temporarily, because eventually such items will have to appear in the financial statements.
The finance professors who conducted the study reasoned that managers that announced bogus stock buyback programs would be more likely to use discretionary accruals. They conclude that the stocks of companies that announce a buyback program, but don’t use discretionary accruals aggressively, generally outperform the market.
Strategies- Are Buyback Stocks Still Good for Investors
According to this Bloomsberg article (9/2007), The Insurance Hoax, property and casualty insurance companies have been making record profits in the current millennium, even during a time of major natural catastrophes, such as Katrina and the California wildfires, by reducing claims payments. Insurers are offering lowball settlements, and if the property owners refuse, then they take it to court. Central to their method of reducing claims payments is the use of software for estimating the costs of claims. Colossus, developed by Computer Sciences Corporation, estimates the cost of auto accidents, including the cost of pain and suffering, and permanent disability. Xactimate, by Xactware Solutions, Inc., has developed software that estimates the cost of rebuilding a home. However, many are contending that these programs are underestimating the true costs of claims. Farmers Group, a subsidiary of Zurich Financial Services AG, has stopped using Colossus because of a class-action lawsuit that claimed that Colossus was underestimating the true costs of injuries.
Other ways that insurance companies have been reducing claim payouts is by changing policies, with the changes applying retroactively, and altering the engineering reports of the people who had actually inspected the damage. Many of these engineering companies depend on the business from the insurance companies, and, so when the insurance companies pressure the groups to lower cost estimates, they tend to comply.
American Express and VISA are now offering creditworthy customers the option to charge their rent or mortgage payment with their credit cards. American Express started allowing the charging of rent in 2003 and mortgage payments in May, 2007 with a few partners—rental developers and mortgage companies—and has expanded it gradually to 200 cities in 35 states. VISA started offering rental and mortgage payment services in 2007.
While it is a great way to earn reward points, it could also lead to greater consumer debt, and lessen the motivation of users to solve critical financial problems right away. Although the program is currently restricted to the most creditworthy customers, considering the highly competitive credit card business, it may be gradually expanded to the general population.
Charge the Rent, but Only if You Don’t Need To
Structured investment vehicles (SIVs) and securities arbitrage conduits make money by selling asset-backed commercial paper (ABCP), and using the proceeds to buy, among other assets, mortgage-backed securities (MBSs), profiting from the difference between the high interest rate received on the longer-term MBSs, and the lower interest rate paid on the commercial paper. However, commercial paper has a maximum maturity of 270 days, far less than most MBSs, so the SIVs have to sell more commercial paper to pay for the ones maturing. When the MBSs get downgraded because of their load of subprime mortgages, SIVs relying on MBSs get downgraded because of its riskier assets. Thus, even without defaults, it has to pay a higher interest rate for its commercial paper, thus, eliminating its profits or even suffering losses. In extreme cases, it cannot even sell its commercial paper, forcing it to restructure or to turn to its sponsoring bank for financing. For instance, Axon Financial, Cheyne SIV, and OTTIMO Funding Ltd. were recently downgraded and forced to restructure because of their inability to sell their commercial paper in the money market.
Many funds are heavily invested in SIVs because they offered higher returns, and seemed very safe, but as more MBSs and other derivatives based on subprime mortgages get downgraded, the funds suffer as the SIVs suffer losses, prompting massive withdrawals from the funds by investors.
Florida freezes $15 billion fund as subprime crisis hits
Montana Fund Sees $247 Million Withdrawals
In the 19th century, firefighters often were paid, not by tax dollars, but by the owner of the burned property, either out of pocket or by the owner’s insurance company. So firefighters were inclined to fight fires only on property that was insured, or where the owner had the financial wherewithal to pay for their services. To save money, some insurance companies in Richmond, VA gave homeowners plaques to indicate that the property was insured, so that firefighters would be motivated to try to save the property—it was a cheap way to prevent a total loss at least sometimes.
Nowadays, insurers aren’t handing out plaques, but some people, notably the wealthy, still get better services than others. With wildfires raging in Southern California, American International Group’s (AIG) Private Client Group is saving itself money by protecting the homes of the wealthy. AIG has a Wildfire Protection Unit which employs firefighters working specifically for AIG to protect people’s homes by applying the fire retardant Phos-Chek, which is also used by the U.S. Forest Service. However, only those whose homes are worth at least $1,000,000 and pay at least $10,000 in annual premiums get the special treatment, although some people with standard policies also got the special treatment if they happened to be nearby. Many people resent this special treatment for the wealthy, but it makes economic sense for AIG, since saving even 1 home pays for the program, especially since many of these homes are worth 3 to 5 million dollars, or more. While not every home is saved, it stills saves a significant sum of money for AIG.
AIG has a similar service for hurricane-prone Florida. AIG sends pre-disaster consultants to assess well-insured properties for possible damages and sends teams of workers to help restore properties even before claims are filed.
People evidently like the good service. AIG’s Private Client Group started providing insurance in 2000 and has already collected more than $1 billion of premiums.
Another Way the Rich are Different: 'Concierge-Level' Fire Protection
Many cases of identity theft rely on stolen social security numbers, which are then used to open credit accounts, often with high balances. The thieves max out the credit lines without any intention of paying back the loans, which leaves the people with those social security numbers on the hook. The identity theft victims then must go through the travails of convincing credit bureaus and creditors that it was not them who took out the lines of credit, and that they were the victims of identity theft.
A credit freeze, which stops the credit bureaus from issuing credit reports to potential creditors, prevents the thieves from getting any more credit with that person’s identity, since almost all creditors require a credit report before they will issue credit or pay out loans. The disadvantage is that the victim of identity theft also cannot get any more credit until he unfreezes his account.
39 states have various laws that allowed consumers to freeze their credit reports, at least to some extent, but now that the credit bureaus see the growing trend, and also see the potential profits to be made by allowing consumers to freeze and unfreeze their credit reports for a fee, all 3 have decided to allow it regardless of where the consumers live. TransUnion was the 1st, while Equifax and Experian will allow it soon—Experian on November 1, 2007. The current fee is $10 to freeze it and $10 to unfreeze it, for each report, except in those states that require a lower fee, and it is free for any victims of identity theft. Therefore, a consumer who is not a victim of identity theft will have to spend $60 to freeze and unfreeze all 3 credit reports. The freeze request can be made by mail, telephone, or email.
The Bank for International Settlements (BIS) reported results from a survey of 54 central banks that in April, 2007, daily trading of currencies reached $3.2 trillion; USD remains the most important currency in the forex markets today, constituting 2/5 of all currency transactions. Total forex trading has risen more than 71% over 2004 levels—the largest increase since the BIS started doing the survey in 1989. Improving and cheaper technology has augmented the increase. Hedge funds and individual investors represented a significant part of the increase. The use of currency derivatives to hedge risk or make profits has also increased significantly—70% since 2004, with over $2.1 trillion worth traded daily. The largest increase, 281%, was in cross-currency swaps which are used to hedge bonds denominated in foreign currency. Cross-currency swaps are transacted when 2 parties agree to exchange interest payments in different currencies for a specified time. Emerging market currencies now account for almost 20% of all currency trading.
Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity
FXCM has introduced fractional pip pricing for their major currency pairs. So instead of seeing a quote of EUR/USD 1.401/04, you may see a quote such as EUR/USD 1.04014/038. While, theoretically, this should yield some savings to the forex trader, it may be more a marketing gimmick than anything else. It would be very difficult to tell if there were any real savings, because the average spread could be just as wide as before, except that you would be subtracting 5 digits instead of 4. Example: 1.44235-1.41235=1.4423-1.4123=3 pips. And even though there will be many differences of fractional pips, that does not mean that the average is better than before.
Fractional pip pricing would be most powerful on an organized exchange where the best bid/ask prices from all market participants are displayed, and would certainly result in narrower spreads. However, there is yet no organized exchange for currency. While FXCM advertises a No Dealing Desk, where quotes from forex traders is shown to a number of participating banks, I don't know how well this works. Someone would have to do a statistical analysis of spreads displayed by FXCM and competing forex dealers, and see if it results in narrower spreads.
For forex dealers, marketing is the name of the game, and certainly fractional pip pricing does sound good. Of course, 1 or 2 pip spreads that are widely advertised by forex dealers sound good, too. I have used FXCM, and they provide a very good service, but I rarely saw 2 pip spreads, even on major currency pairs such as EUR/USD. It's one thing to advertise such spreads, and another to actually see them and trade them.
http://www.fxcm.com/fractional-pips.jsp
Progressive Corp. and GMAC Insurance are offering discounted rates to drivers who drive fewer miles. GMAC offers the discount of as much as 54% in 34 states, but only with GM cars that have OnStar navigation where mileage is verified by comparing the odometer mileage at the beginning and end of the term. Progressive's TripSense plan is offered only in Minnesota, Michigan, and Oregon, but is available for any car model. The driver must install a small device that will verify mileage, and, to receive the 5% - 25% discount, the driver must download and report their miles.
Drive Less, Pay Less for Auto Insurance
When a lender forecloses on a home, the IRS treats it as a sale. If the borrower is not personally liable for the debt, such as would be the case for a nonrecourse loan, then the selling price is equal to the price of the cancelled debt. If the borrower is liable for the debt, then the sale price is equal to the canceled debt up to the fair market value (FMV) of the home. If the canceled debt is greater than the FMV, then the difference between the debt and the FMV is treated as ordinary income, for which the lender is required to send a Form 1099-C, Cancellation of Debt (COD), listing the amount of ordinary income. Any unpaid liabilities on the property, such as property taxes, will reduce the FMV of the home and increase the COD. However, if the liabilities are paid by the borrower, then this will increase the FMV and decrease the COD. The lender will also send a Form 1099-A, Acquisition or Abandonment of Secured Property, that will allow the borrower to determine the capital gain or loss from the foreclosure. Taxes must be paid on the capital gain in addition to any ordinary income from the canceled debt that exceeds the FMV of the home in a recourse loan. For a nonrecourse loan, any income is treated as a capital gain equal to the canceled debt minus the adjusted basis of the property—there is no COD income. However, a capital loss from a foreclosure cannot be deducted.
With the recent decline of home prices, many homes are worth less than the amount of money owed on the property, especially for borrowers who took advantage of lax lending standards, and bought with no money down or used inflated home appraisals. Consequently, many homeowners whose homes were foreclosed by the lender may owe a significant amount of taxes.The IRS treats all forgiven debt as ordinary income, even though in the case of foreclosure, the homeowner doesn’t get to keep the home.
If the taxes are not paid for the year the debt was canceled, then the IRS adds penalties and interest to the total tax bill, which can often be tens of thousands of dollars.
However, the tax is not owed:
Because the lender has some discretion in valuing a home, it can sometimes be successfully argued that the fair market value of the home was greater than the debt, in which case, no tax on COD is due.
After Foreclosure, a Big Tax Bill From the I.R.S.
Some real estate companies are combining experienced local real estate agents with e-commerce applications that reduce the workload of the agents, which allows these companies to pay the agents less for each sale, which allows the companies to pass the savings to the company's clients.
Right now, Redfin covers the San Francisco Bay Area, Los Angeles, San Diego, Orange County, Boston, and Washington D.C.
Sellers pay a flat fee, either an upfront fee of $3,000 or $4,000 at closing, for those people who don't want to pay upfront, or in those states, such as California, that don't allow payment of an upfront fee. The houses are listed on the Multiple Listing Service (MLS). The seller saves $11,000-$12,000 of the typical seller's commission on the average Redfin home price of $500,000.
Buyers, if they don’t use an outside buyer’s agent, save 2/3 of the buyer's agent's commission that is refunded at closing, which can amount to $10,000 on a $500,000 home. The average commission refund was 1.95% of the purchase price in Redfin’s 1st year of operation.
Buyers can tour homes online and draft an offer online. Redfin handles the negotiations and the paperwork, and gives a 100% satisfaction guarantee.
Redfin doesn’t use dual agency—different agents will be assigned for the buyer and seller of the same property, if necessary.
To find homes, the buyer can use maps on Redfin’s website to zero in on a general area. Homes for sale are represented by small green houses on the map. Selecting 1 of the houses highlights more detailed information displayed in a table and shows a picture of the property. There are also links for much more detailed information for each property. The buyer can use a filter to narrow search results, such as price range or number of bedrooms, etc, and the map can also show what surrounding property recently sold for.
BuySide Realty is another similar service with coverage in more states, but offers its services to buyers, who are refunded 75% of the commission at closing. BuySide agents are members of the National Association of REALTORS.
Bad Credit? Insurers Will Make You Pay!
Many, if not most, insurers are using insurance scores in determining what premium to charge a customer. Like the credit score, the insurance score is based on information in credit files, but the score is based more on payment history and total debt than other factors that influence the traditional credit score. This is because insurance companies believe that someone in financial trouble is more likely to file a claim. They may get the score from Fair Isaac, ChoicePoint, or they will calculate their own score based on data in 1 or more credit files. However, some companies weigh the score more heavily than others. The Supreme Court decided a case in June, 2007, involving Geico and Safeco, that companies do not need to inform consumers if they are charged higher premiums because of a low credit score.
You can raise your insurance score by making payments on time and lowering your debt load. Although late payments can stay on a report for 7 years, only the last 2 years influence the score, with older information being less important. When shopping for insurance, it doesn't matter much what's affecting your score, since the best way to find the lowest price is to shop around. For more info, see Credit Scores and Credit-Based Insurance Scores.
Insurance Scores — a brochure by Fair Isaac, explaining the advantages of using credit-based insurance scores for the insurance business.
NAII Statement to the National Conference of State Legislatures — Arguments presented by the National Association of Independent Insurers as to why the state of Michigan should allow the use of insurance scores in helping companies to determine who they will insure and at what price.
BUSINESS AND INDUSTRY OPPOSITION ARGUMENTS BY COMPANY OR ASSOCIATION — Arguments sorted by company or association for the use of insurance scores in Michigan.
Higher Deductibles Sting Homeowners
Many insurance companies are now using percentage deductibles in 17 states vulnerable to such natural disasters as wind, flood, hail, and earthquake—that range from 1% - 15% of the insured value of the home—instead of the traditional dollar deductible, such as a $1,000 deductible, for instance. Percentage deductibles usually result in higher deductibles that help insurance companies limit their losses in a major disaster. For instance, a house insured for $500,000 with a 5% deductible is equal to a $25,000 deductible. Although the deductible is higher, insurance premiums are generally lower with percentage deductibles. However, some states, such as North Carolina and Georgia, don't allow percentage deductibles. Some states give consumers a buy-back option that allows them to have a dollar deductible in exchange for higher premiums.
No Market in the Secondary Mortgage Market
Because of the recent fallout from the subprime mortgage market, investors have been very reluctant to buy mortgage-backed securities. Only those loans that conform to the standards of government-sponsored enterprises (GSE), such as Ginnie Mae and Fannie Mae, which are guaranteed by the full faith and credit of the United States, can be sold. Even Alt-A mortgages, most of which are more creditworthy than subprime, are difficult to sell unless they are rated AAA.
Mortgage rates will rise because lenders can't resell their loans in the secondary market, which means they'll have to carry the loans, which leaves less money to lend out for additional loans. Thus, limited supply will raise prices, causing home prices to fall even more than they already have.
Mortgage rate increases will be substantial for nonconforming loans. Usually, the cost of making nonconforming loans is 102% of the loan value, but nowadays 103% is not enough. It is predicted that rates for nonconforming mortgages will be at least 100 basis points higher. Because conforming mortgages have a limit that is lower than many houses in the most expensive areas of the country, it will be more difficult to get loans for more expensive real estate, which will inevitably lead to lower prices.
The credit ratings of certain collateralized debt obligations (CDO) will soon be downgraded in light of the increasing delinquency rate of subprime mortgages. About 40% of CDOs consists of residential mortgage-backed securities (MBS), and ¾ of that consists of subprime loans and home-equity loans, which have a lower lien status. Predictions are being made that CDOs will experience significant losses if home prices continue to depreciate, which is expected to continue at least until 2008.
Much of the subprime trouble was caused by mortgage fraud and falsifications in credit reports. Thus, credit scores, loan-to-value ratios, and ownership status have become less reliable as indicators of creditworthiness, so S&P, which rates much of the CDO issues, is changing its methodology. One change is that higher-rated tranches will need greater credit enhancement to prevent being downgraded if lower tranches in the same issue are downgraded.
A CDO issue divides its MBSs into different tranches, or classes, with different risk profiles. Lower credit-rated mortgages compose the lower tranches, which gives a higher credit quality to the upper tranches. However, all tranches must be sold, or the CDO cannot be issued. Thus, the lower credit ratings of the lower tranches may decrease the number of CDOs that can be sold, which, in turn, will decrease the number of mortgages that can be sold, which will increase mortgage rates for all borrowers.
Nowadays, with the help of friends, family, or certain websites, people with poor credit have been raising their credit scores by becoming authorized users of credit cards with an excellent credit history—termed piggybacking.
According to this New York Times article, Ron Totaro, vice president for global scoring solutions at Fair Isaac, has indicated that, starting in September, the FICO scoring algorithm will no longer include authorized user accounts in its formula for calculating FICO scores.
Goodbusinessday®.com is a continuously updated source of information on holidays and observances affecting global financial markets—bank holidays, public holidays, currency non-clearing days and trading and settlement holidays affecting exchanges. Data is organized by country, city, currency and exchange. Interactive calendars and one-click search facilities provide the information you need in an instant.
Be wary of forex scams. In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists.
The CFTC and NASAA have prepared a list of warning signs investors should watch for before investing in a forex opportunity. The warning signs include:
The regulators also urged those who have recently acquired or have accumulated large sums of cash to be on guard. In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators. “Getting your money back once it is gone can be difficult or impossible,” Dunn and Borg said.
Investors should make sure that anyone offering a forex investment is properly licensed and has a reputable business history. The public can obtain information about any firm or individual registered with the CFTC, including any actions taken against a registrant, through the National Futures Association (NFA) Background Affiliation Status Information Center (BASIC), available on the NFA website at: www.nfa.futures.org/basic. You can also find out if someone is registered by calling the National Futures Association at 1-800-676-4632.
The CFTC’s Division of Enforcement has established a toll-free telephone number to assist members of the public in reporting possible violations of the commodities laws: 866-FON-CFTC (866-366-2382). If you think that you have been a victim of a forex scam, you can report it on the CFTC’s website, http://www.cftc.gov/enf/enfform.htm, or by mail addressed to the Office of Cooperative Enforcement, CFTC, 1155 21st St., NW, Washington, DC 20581.
Many state securities regulators also have the right under their state laws to take action against illegal commodities investments. Visit NASAA’s website at www.nasaa.org to contact your state or provincial securities regulator.
This study found that many companies that buy back a significant amount of their own stock may be manipulating the company’s earnings downward right before the buyback, which is then adjusted upward after the buyback is completed, resulting in better than average performance.
(Note: the above video link may not last long.)
The most lucrative months to be in the stock market, according to the Stock Trader's Almanac 2007, is from November to April. Over the past 57 years, the Dow Jones Industrial Average gained only 174.61 points over the worst 6 months of the year, from May to October, but gained a total of 12,850 points over the best 6 months, from November to April. That's almost all of the Dow's gain. (Closing value on 5/15/2007: 13,383.84.)
If you had invested $10,000 in the stock market, but only kept your investments during the best 6 months, from November to April, over the past 57 years, you would have $588,000 today. However, if you had kept your investments in the market for only the worst 6 months of the year, from May to October, the value of your investment would only be $10,341—barely more than you had invested 57 years ago!
Reasons given for the increase in the best months are that people invest year-end bonuses and tax returns, and make 401(k) contributions.
The video did point out, however, that May was the best month, for 13 straight years, from 1985 to 1997, for the S&P 500.
One thing that I have observed is that the 1st half of May is often good, as it has been this month, but then it starts declining toward the end of the month. I also believe that one could do better by beginning the investment period in mid-October, after the stock market reaches its low point, rather than waiting until November. The stock market usually starts rising toward the end of October, especially after the 3rd Friday of the month, when October options expire, then the rise simply continues into November.
There are other ways of investing in currency besides buying the currency itself. Now with the U.S. dollar at historic lows against other currencies, some banks have introduced new products to take advantage of the current currency market. Barclays PLC, for instance, has recently introduced 3 exchange-traded notes (ETNs) that offer investment opportunities in the Euro, yen, and the pound.
Other ways to invest in foreign currency is to buy foreign bonds or stocks, or to invest in currency mutual funds, or bond funds, or to invest in trusts that hold bank deposits in foreign countries, such as the CurrencyShares Euro Trust from Rydex Investments. However, some of these investments may have more risk than the currency alone, since some investments are using leverage, futures, or other derivatives to increase returns, which also increases potential losses.
Other investment vehicles are trying to benefit from the risky carry trade, where futures are bought in countries with a high interest rate and sold in countries with a low interest rate.
Apparently, there is so much money in the fixed-income market, that yields are declining significantly more than the risk, which could be creating a private equity debt bubble.
Debt markets for private equity have become riskier because:
Why are lenders loosening underwriting standards to make more loans? Because the loans can be securitized, and the risks can be passed onto investors. Commercial mortgages are securitized into commercial mortgage-backed securities (CMBS), and divided into tranches of varying risk, which are then sold to investors. This is how the subprime mortgage market ballooned into the leviathan that it is today—banks securitized the debt and sold it to investors, thereby transferring the risk as well, which freed up more capital to lend even more. With so much money to lend, lenders marketed to borrowers with greater credit risk or lent money to pay bubble-inflated real estate prices, thus creating the current real estate bubble, with the inevitable decline in home prices, and, of course, greatly increased foreclosure rates.
CMBS issues in the last quarter of 2006 were nearly double the previous quarter, and continues to grow. Because of increased competition, underwriting standards have deteriorated, and riskier deals are being made, including interest-only loans, and even negative amortization loans. Although default rates have been low recently, this is bound to change. Thus, buyers of junk-grade bonds should beware.
REX & Company, a small San Francisco real estate investment company is offering homeowners a way to get cash out of their homes by allowing it to invest in the price appreciation of their primary house—not rental or investment properties. When the house is sold, REX would receive a percentage of the increase, and if the house were sold at a loss, REX would get less than what you received from REX for its interest. The amount of money that you would receive would depend on what REX's percentage is in the appreciation of your home. According to its website, REX establishes what it calls the Option Exercise Price, which is paid to the homeowner as 2 payments. The Advance Payment is paid when the homeowner signs the REX Agreement. The Remaining Payment is paid when the REX Agreement ends, in 50 years or when the home is sold, whichever occurs 1st. (I'm not sure about the details of this, but it seems that the Remaining Payment is not really a payment, unless your house declined considerably in value, since you would then have to pay REX its share of your home's appreciation, which would probably be a lot more than the Remaining Payment. Also, does REX pay interest on the Remaining Payment?)
It is not a loan nor is it a reverse mortgage, so no interest is charged and no payment is required until the house is sold, or the REX Agreement ends. You could get a lump sum payment for up to 13% of your home's appraised value. There are no minimum income or asset requirements, but you do need a FICO score of at least 680. You do not need to pay off the mortgage, and you can terminate a REX Agreement at any time by paying REX the value of its interest in your home. Currently, it is available in only 9 states, but REX is planning to expand in all 50 states shortly.
New financial products—structured products and equity-indexed annuities—are being marketed that promise an investor possible good returns, but no losses.
Structured products and equity-indexed annuities are basically contractual derivatives that an investor purchases in exchange for returns based on the terms of the contract, which is predicated upon other financial assets or derivatives. (Structured products are sometimes called structured notes, because they are much like bonds or notes—contracts that promise to pay according to the terms of the contract, and have a maturity date, when the investor will get back the principal.)
Structured products are issued by brokerages and trade on the American Stock Exchange. An example of a recently issued note—a type of note called an indexed-linked note—is the Morgan Stanley Capital Protected Notes (GBI);(Prospectus for GBI). This note derives its value from 3 indexes, equally weighted: the Dow Jones Euro Stoxx 50 Index, the Standard & Poor's 500-stock index, and Japan's Nikkei 225. The original issue date was February 28, 2007 for $10 per share, it pays a small dividend, and matures in 2011. These notes are senior unsecured obligations of Morgan Stanley.
A drawback to the notes is that it is difficult to currently ascertain the liquidity of the products.
Equity-indexed annuities are issued by insurance companies and also have a no-loss guarantee, and are based on stock indexes. However, they have severe drawbacks:
An important caveat for both of these products is that the guaranteed return, like bonds, depends on the financial status of the issuer. If the issuer becomes insolvent, then these financial instruments could become worthless.
Presently, there is no futures contract for uranium, but there soon will be at the New Your Mercantile Exchange. Naturally, this contract will be cash-settled. The demand for uranium has been growing substantially as countries look to nuclear power to replace more expensive oil. Spot price in industry contracts has grown from @22.50 per pound in March, 2005 to $113 in April, 2007, and annual demand has exceeded supply by 50%.
As tax time approaches, various articles, on the web and in print publications, detail tips on how to save on taxes. One of these tips often mentioned is the retirement savings contribution credit. If you make a contribution to a traditional IRA, a Roth IRA, certain salary reduction contributions, or contributions to a section 501(c)(18) plan, you, supposedly, may be able to claim a credit for up to $1,000 for a $2,000 contribution, if your adjusted gross income is low enough. That sounds really nice! Put $2,000 into your IRA or Roth account and have the federal government pay for half of that.
However, the devil is in the details, specifically, in the way that the retirement savings contribution credit is calculated. On Form 8880, the form used to calculate the credit, you must take the amount on line 46 on Form 1040, which is the adjusted gross income minus the standard deduction and personal exemptions, then subtract the sum of any foreign tax credit, the credit for the elderly or disabled, the credit for child and dependent care expenses, and education credits. This will yield the maximum amount of the credit. However, because of the income limitations for the retirement credit, subtracting the standard deduction and personal exemptions will yield a tax that is lower than the maximum credit, even if the sum of the above credits (lines 47-50) is zero. And because the amount of the tax is calculated before social security taxes are added, the credit can’t be used to offset any social security taxes.
To illustrate, consider the following examples for the tax year of 2006:
So the government isn’t so generous after all! Permalink
Employee stock options are usually granted to management personnel to attract talent and to motivate them to increase the value of the company, and, therefore, its stock price. Employee stock options give the employee the right to buy company stock after a stipulated period of employment for a stipulated price that is usually equal to the price of the company's stock when the stock option is granted. The recent news about back-dated options involves specifying a date previous to the actual granting of the option, when the stock price was at its lowest, thereby making the stock option grant more valuable, but not accounting for the added expense in financial statements.
Employee stock options differ from exchange-traded call options because
there is a vesting requirement that requires the employee to work a minimum number of years for the company;
the term of the options can last 10 years or longer;
and if an employee leaves the company, he must either exercise his vested options or forfeit them.
Stock options have value, so if a company grants employees stock options, then the company is giving something that has value. If the company sold the options to the public, it would have more cash. By giving it to employees, it is giving an equivalent of cash, and, therefore, it should be expensed on the company’s income statement. However, many companies have resisted this, because it will result in lower reported earnings.
The purpose of evaluating employee stock options is to determine the impact on company earnings such grants have. Previously, many companies, particularly high-tech companies that used them extensively to attract top talent, reported the option grants in footnotes rather than as a compensation expense, which could greatly lower reported earnings. On the other hand, it is more difficult to evaluate footnotes than to compare numbers among different companies. Now that companies are required to expense option grants, they are looking at various ways to determine a value for the granted options.
Various pricing models are used, especially the Black-Scholes formula, which is commonly used to valuate exchange-traded options. The problem with using pricing models is that different companies can use different models, and, thus, it may be misleading for investors to compare the financial numbers of one company with another. A further complication is that a major component of all pricing models is the volatility of the stock, which has to be estimated.
One company, Zions, tried a marketing approach by creating options with similar terms to employee stock options, then sold them to sophisticated investors at a an auction. The options sold for half of what pricing models would have predicted. However, this market-based approach may be flawed, due to the number and sophistication of the bidders, and various other factors.
It seems unlikely that the market value of an employee stock option will be equal to its actual expense to the company, for they are not really connected. Companies, of course, prefer the market value if it lowers the compensation expense, and Zion’s experiment would seem to indicate that. Of course, if pricing models yielded a lower figure, then companies wouldn’t even be talking about using the market model, which has its own problems, such as actually issuing the securities and selling them in a bidding auction. The companies just want a lower expense number, which will result in higher reported earnings. It may be better to require companies to use a single pricing model so that investors can compare apples to apples.
These artlcles underscore 2 important disadvantages to holding stocks in a margin account, which are often lent out to short sellers, and if they are:
You cannot vote with your shares, but the borrowers of the stock can, in what is being called empty voting;
and if the stocks pay a dividend, what you actually get instead of a dividend that may qualify for the favorable tax rate of 5% or 15%, is a payment in lieu of dividends, which is taxed as ordinary income that may be as high as 35%.
What's worse, the borrowers of the stock, often short-sellers, can vote in the worse interest of the corporation to try to deflate the stock price, and thereby profit from short selling—thus, voting against the interests of the true owners of the stock.
A possible scenario is for a hedge fund, which frequently profits from short selling, is to borrow the shares right before the record date—usually 30 days before the vote, and vote in its own interests. Delaware law, which governs most large companies because they are incorporated in the state, give voting rights to whomever happens to have the stock on the record date. Often, owners of the stock are unaware of the lending, that their right to vote has been transferred to someone else.
Sometimes, because of inadequate accounting, both actual stockholders, and the borrowers, both vote, leading to overvoting, which the New York Stock Exchange has found to be a frequent occurrence in some instances.
Corporate credit cards are often issued so that an employee can pay and track expenses, and the bill must be paid in full, so there is no accumulation of interest. With a corporate credit card program, either the company takes responsibility for timely payments, or assigns that responsibility to the employee.
If the company takes responsibility, it will generally pay the bill after the employee files an expense report; otherwise, the employee pays the bill.
When the corporation is responsible, then an employee's credit record and credit score will not be hurt if the payment is late. Even when the employee is responsible—43% of the time according to 1 survey—the credit card companies may give the employee an extended grace period. American Express, the major corporate card issuer, won't report the delinquency for at least 180 days past the due date.
However, late payments can result in loss of rewards or require the payment of a fee to reinstate the rewards, or require payment of late, suspension, or reinstatement fees. It may also hurt the employee's relationship with the company, since it not only indicates that the employee isn't very responsible—a quality needed for most jobs—but the company may get less of a refund from the credit card company because of higher delinquency rates.
New energy-saving tax credits, expanded retirement savings incentives and new rules for giving to charity are among the changes taxpayers will find when they start filling out their 2006 federal income tax returns.
More information about the changes, summarized below, can be found on this Web site and in various IRS documents, including the instructions for Form 1040.
In addition, some important changes, not covered here, are addressed in separate fact sheets. They include:
FS 2007-1, One-Time Tax Refund Available to Long-Distance Telephone Customers
FS-2007-3, Recently Enacted Tax Law Extends State Sales Tax Deduction
FS-2007-4, Special Steps Needed for Paper 1040 Filers to Claim Late Tax Changes
FS-2007-5, Taxpayers Have More Direct Deposit Options for their 2006 Refunds
FS-2007-9, Credit Available for Taxpayers Who Purchase or Lease Hybrid Vehicles In 2006
A ten-percent credit can be claimed for various energy-saving improvements made to a taxpayer’s main home. The credit is based on the cost of new energy-efficient improvements including insulation, exterior windows, exterior doors, water heaters, heat pumps, central air conditioners, furnaces and hot water boilers. The overall credit is limited to $500 and further dollar limits apply to specific components (for example, 200 for windows).
Separately, there is a thirty-percent credit for the cost of photovoltaic property, solar water heating property and fuel cell property.
These credits are claimed onForm 5695. See the instructions for this form for more information.
For 2006, the contribution limit for Roth and traditional IRAs rises to $5,000, up from $4,500 in 2005, for those age 50 or over. For those under 50, the limit remains unchanged at $4,000.
The $10,000 phase-out range for IRA deductions for those covered by a retirement plan begins at income of $75,000 if married filing jointly or a qualifying widow(er), up from $70,000 in 2005. It still begins at $50,000 for a single person or head of household and at $0 for a married person filing a separate return. Use the worksheet in the Form 1040 instruction booklet for Line 32, Form 1040.
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b) and most 457 plans rises to $15,000. For SIMPLE plans, the limit remains at $10,000. The catch-up contribution limit for persons age 50 or older rises to $5,000 for 401(k), 403(b) and 457 plans and to $2,500 for SIMPLE plans.
Beginning in 2006, 401(k) and 403(b) plans can create a qualified Roth contribution program so that participants may choose to have part or all of their elective deferrals to the plan designated as after-tax contributions. Despite the name, a so-called “Roth 401(k)” is not the same as a Roth IRA.
Military members serving in Iraq, Afghanistan and other combat zone localities can count tax-free combat pay when figuring how much to contribute to a Roth or traditional IRA. Because taxpayers usually must have taxable earned income, members of the military whose earnings came from tax-free combat pay were often barred from putting money into an IRA. This change is retroactive to 2004, and eligible taxpayers have until May 28, 2009 to make contributions for 2004 and 2005. Taxpayers who have already filed returns for 2004 and 2005 and choose to make these special back-year contributions to a traditional IRA must report them on an amended return ( Form 1040X), along with, in some cases,Form 8606.
Military reservists, including members of the National Guard, called to active duty can receive payments from their individual retirement accounts, 401(k) plans and 403(b) tax-sheltered annuities, without being subject to the additional ten-percent early-distribution tax. The ten-percent tax that normally applies to most retirement distributions received before age 59 ½ is waived for reservist called to active duty for at least 180 days or for an indefinite period. Eligible reservists activated after Sept. 11, 2001 and before Dec. 31, 2007 qualify for this relief. Although the ten-percent early-distribution tax does not apply, regular income taxes continue to apply to these payments in most cases.
To be deductible, clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better. However, a taxpayer may claim a deduction of more than $500 for any single item, regardless of its condition, if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
To deduct any charitable donation of money, taxpayers must have a bank record or a written communication from the recipient showing the name of the organization and the date and amount of the contribution. Though taxpayers are already required to keep records to support their contribution deductions, this new provision is designed to provide greater certainty, both to taxpayers and the government, in determining what may be deducted as a charitable contribution. This provision applies to contributions made in taxable years beginning after Aug. 17, 2006. For taxpayers that file returns on a calendar-year basis, including most individuals, the new provision applies to contributions made beginning in 2007.
An IRA holder, age 70 ½ or over, can directly transfer tax-free, up to $100,000 per year to an eligible charity. This option is available in tax years 2006 and 2007. Eligible IRA holders can take advantage of this provision, regardless of whether they itemize their deductions. Funds must be contributed directly by the IRA trustee to the eligible charity. Transferred amounts are counted in determining whether the holder has met the IRA’s required minimum distribution rules. .
Children under 18 who receive taxable investment income may need to figure tax using their parents' higher marginal rates. The tax does not apply to a married child who files a joint return. In the past, the so-called “kiddie” tax only applied to children under the age of 14. Also, the amount of taxable investment income a child can have without being taxed at their parent's rate rises to $1,700, up from $1,600. The rest of the child’s taxable income — earned income plus unearned income minus the standard deduction — is taxed at the child’s regular rates.
For tax year 2006, the alternative minimum tax exemption rises to $62,500 for a married couple filing a joint return, up from $58,000 in 2005, and to $42,500 for singles and heads of household, up from $40,250. Under current law, these exemption amounts will drop to $45,000 and $33,750, respectively, in 2007.
The standard mileage rate for business use of a car, van, pick-up or panel truck is 44.5 cents a mile.
The standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 18 cents a mile.
The standard mileage rate for using a car to provide charitable services solely related to Hurricane Katrina is 32 cents per mile. Otherwise, the rate for providing services to charitable organizations is set by law and remains at 14 cents a mile.
Personal exemptions and standard deductions rise, tax brackets are widened and more than three dozen individual and business tax provisions are adjusted to keep pace with inflation. A complete rundown of these changes can be found in "2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits."
Popular items adjusted include the following:
The value of each personal and dependency exemption is $3,300, up $100 from 2005. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. An individual who qualifies as someone else’s dependent cannot claim a personal exemption, and personal and dependency exemptions are phased out for higher-income taxpayers.
The standard deduction is $10,300 for married couples filing a joint return and qualifying widow(er)s, a $300 increase over 2005; $5,150 for singles and married individuals filing separate returns, up $150; and $7,550 for heads of household, up $250. Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else’s dependent. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions, and state and local taxes.
The maximum earned income tax credit is $4,536 for taxpayers with two or more qualifying children, $2,747 for those with one child and $412 for people with no children. Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2006, rise to $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children. One in six taxpayers claim the EITC, which unlike most tax breaks, is refundable, meaning that people can get it, even if they owe no tax and even if no tax is taken out of their paychecks.
The maximum Hope credit rises to $1,650 (100% of the first $1,100 of eligible expenses and 50% of the next $1,100 of expenses). These dollar amounts are doubled for students attending an eligible educational institution in the Gulf Opportunity Zone. The Hope and lifetime learning credits are phased out if a taxpayer’s modified adjusted gross income (MAGI) is between $45,000 and $55,000 ($90,000 and $110,000 if filing a joint return).
A reverse mortgage is a nonrecourse loan made to a homeowner, where the lender pays the homeowner either a lump-sum payment or periodic payments, usually monthly, that is based on the equity in the house, or approves a line of credit that the homeowner can draw on at any time. The amount received is proportional to the borrower’s age and inversely proportional to the prevailing interest rates, and depends on the geographic location and the value of the home. (For an estimate of what you can get, check out the AARP's Reverse Mortgages Calculator.)
Reverse mortgages allow older homeowners to receive cash, while still living in their homes. The loan is repaid when the homeowner dies, or when it is sold. If the lender fails to receive the full amount of the loan with interest, then the lender must accept the loss. Any equity left over is returned to the borrower, his estate, or to his heirs.
The disadvantage of reverse mortgages is the substantial fees, which can include an origination fee for up to 2% of the home’s equity, not the lower loan amount; and up to 2% of the loan amount for the mortgage insurance premium.
Most reverse mortgages, about 90%, are insured by the Department of Housing and Urban Development (HUD) with a Home Equity Conversion Mortgage (HECM).
In addition, borrowers for all federally insured mortgages, and most privately insured mortgages, must take counseling about reverse mortgages to ensure that they understand the risks.
Loans insured by HECM cannot exceed a certain amount regardless of the value of the house—$362,790 in urban areas and $200,160 in rural areas. Jumbo reverse mortgages exist for more expensive homes, but these are privately insured, and have higher fees, including an interest rate that could be up to 2% higher than for a federally insured loan.
Reverse mortgages have been surging, with half of all such loans issued within the past 2 years. With baby boomers retiring, this number is expected to increase rapidly, which will increase competition in the marketing of reverse mortgages, thereby lowering fees and costs.
HUD is also trying to lower origination fees and mortgage insurance premiums. Ginnie Mae announced in October, 2006 that it will package reverse mortgages as securities, which will help to lower interest rates on the loans by reducing the risk for lenders.
Private investment in public equity securities (PIPES) are unregistered securities, which can be stock or convertible debt, issued by small-cap, high growth companies that are sold in a private placement to institutional investors at a 5% - 15% discount to the issuer’s common stock. The company then tries to register the PIPES with the SEC so that they can be sold to the public by the original investors. PIPES allow a small company—which cannot get loans or more traditional financing because the company is too small, unproven, or too heavily in debt—to avoid the time and expense of a public offering, and receives immediate cash.
Although PIPES have surged recently, the SEC has significantly slowed the registration of these securities because of the risks, which include insider trading and the significant dilution of the common stock, which can lower stock prices. Often, the number of shares issued as PIPES is more than the number outstanding, so the SEC has been reluctant to register more shares than 33% of the public float—the number of shares held by the public, to prevent significant dilution and the consequent undermining of the common stock price.
The SEC is also leaning toward treating the resale of the securities as a more heavily regulated primary offering rather than as a secondary offering. The SEC may provide more information, in 2007, as to when the resale of PIPES can be considered a primary offering or a secondary offering.
AIM (Alternative Investment Market), launched in 1995, is part of the London Stock Exchange for new companies, that requires less money and less disclosure to get listed than it does on an American exchange, leading to more new companies being listed than for the New York Stock Exchange and NASDAQ combined. Half of AIM’s 1600 companies have listed since 2005, with almost 300 companies outside of the U.K. 90% of the companies have market values of less than £100 million (about $197 million).
To get listed on the London Stock Exchange, the Financial Services Agency of Britain reviews listings to prevent fraud, much as the SEC reviews listings for new companies before they can offer shares to the American public. AIM uses nomads, instead.
Nominated advisers, or nomads, who typically work for a stock brokerage, reviews the company’s documents to learn about management, financial controls, and growth potential, to decide if it should be listed on AIM. If approved, then companies must pay an annual fee of $7,595 to the exchange, and $40,000 to $100,000 to their nomad. To contrast, the annual cost of an NYSE listing ranges from $38,000 to $500,000, and NASDAQ, $21,225 to $75,000.
Once listed, the nomad provides advice on handling news and is supposed it ensure that the company is serving shareholders well. Because many nomads tout the companies under their watch, they have a vested interest in presenting the company in the best possible light, making any information they provide about the company suspect. The London Stock Exchange has 14 people monitoring nomads and any unusual price movements in any stocks. An external committee handles any discipline deemed necessary. If a nomad, who cannot sanction the company for violations, has any qualms about its company, the nomad is required to contact the London Stock Exchange.
There are a few conflicts of interest in using nomads as overseers. If a nomad resigns, for instance, trading of the company stock is halted until a new nomad is found. Another conflict of interest arises because the listed company can dismiss its nomad, whose brokerage would lose the fees paid for nomads, which could cause nomads to overlook irregularities.
In general, companies listed on AIM have not done well. The FTSE AIM Index is down slightly, compared to the 16% growth in the Russell 2000 Index, which is composed of companies similar in size, for the same period.
Pink Sheets, LLC, is planning a similar service in the United States, referring to the nomads as the Designated Adviser for Disclosure, or DAD.
As people live longer, there is a danger that they will outlive their income. At least 20% of people aged 65 will live at least another 30 years. Longevity insurance is like a single-payment deferred annuity that is typically purchased by the annuitant around retirement age to receive guaranteed monthly payments for the rest of the annuitant’s life, starting at around age 80-85. It differs from a deferred annuity in that the payment schedule is determined at the time of purchase, whereas the payouts of a deferred annuity are determined when the payments start, and will vary depending on how well the invested money performed. Thus, one advantage of longevity insurance is that the annuitant knows exactly how much she’ll be getting, but the disadvantage is that the payout remains the same even if the markets do well over the years.
The main advantage is the much larger payouts of longevity insurance over a deferred annuity for the same investment—more than 4 times greater—which is possible because most people will die before receiving any payout, leaving more for those who survive. If the annuitant dies before receiving any payments, then the insurance company keeps the money. Another advantage is that since the payout is known, estate planning is easier.
Because only a few insurance companies are offering this coverage—MetLife, Hartford, and the New York Life Insurance Company—costs are high, especially the sales commission, which can be as high as 5%-7%. And although some options can be added, such as a death benefit, inflation protection, or a return of premium, this can greatly increase the cost. Also, the inflation protection doesn’t start until the payouts start—inflation until then is not covered.
The above site allows you to check your report at ChexSystems, if they have a report on you. However, they do not display the information online. You have to call, and provide the information to their automated voice system, and then they mail you your report in about 5 days. The site has a sample report that details what is covered.
The ChexSystems Consumer Report may include any debts owed to a bank, writing checks without sufficient funds, and returned items. Major sections include:The New York Stock Exchange Group, Inc. has received approval to list bond issues of all NYSE-listed companies on its exchange. The SEC has granted the NYSE an exemption to the rule that required that each bond be registered before it could be listed on an exchange. Exchange-listed bonds would have the more competitive bid/ask pricing system over the usual best-efforts approach where a bond broker would call 3 dealers to get the best price among them, even when there could be thousands of other dealers in the bonds—at least a few of whom would almost certainly have better prices. An exchange-listed bond price would aggregate all prices available for the bond into the best ask/bid price in the same way that stocks and options are listed.
The NYSE Group is also currently seeking SEC approval for a new fixed-income trading exchange that will be called NYSE Bonds.
Dividend-paying stocks generally don't yield as much as bond funds, but they do have a greater potential for capital appreciation, and with qualified dividends, the top tax rate for the dividend income is 15% for most investors, and only 5% for people in the 2 lowest tax brackets. As an example, Goldman Sachs Growth and Income Fund is currently yielding about 1.5%, but its gains, with stock appreciation, through October 31, 2006 is 17.84%.
Because funds of other countries pay higher dividends than in the United States (S&P 500 average: less than 2%), many stock funds buy qualified foreign stocks paying 5% to 7%. Alpine Dynamic Dividend Fund, for instance, had a yield of 12.6% through October 31, and a total return of 14%.
The preferential tax treatment, which will expire in 2010 unless renewed by Congress, applies only to dividends paid by many United States and foreign companies, not to cash distributions earned through other investments of the mutual fund, such as earned interest, even if the fund holds mostly qualified dividend-paying stocks. The mutual fund will designate which earnings are qualified dividends on the Form 1099-DIV.
In general, to qualify for the lower tax rates, the taxpayer must hold the dividend-paying stock for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date – the first date that the buyer will not be entitled to receive that dividend. This same condition applies to qualified dividends paid out by mutual funds—the shareholder must have owned the mutual fund shares for a 61-day period that included a payment of dividends.
A similar holding period exists for preferred stock dividends attributable to a period exceeding 366 days. This holding period is at least 91 days during a 181-day period beginning 90 days before the ex-dividend date.
Mutual funds, other regulated investment companies, and real estate investment trusts that pass through dividend income to their shareholders must meet the holding period test for the dividend-paying stocks that they hold in order for corresponding amounts that they pay out to be reported as qualified dividends on Form 1099-DIV. Investors must then meet the test relative to the shares that they hold directly, from which they received the qualified dividends that were reported to them.
Shariah is the law of Islam and it bans usury and interest payments—consequently, it also bans bonds. So that Muslim countries can benefit from international investment, and so international investors can invest in projects in Muslim countries, variations of the typical bond have been financially engineered to work somewhat like bonds, but still be compliant with Shariah—thus, they are called Islamic bonds.
One such structured product is the lease-back, or ijarah, structure. If a company wanted to raise money to build a plant, for instance, using this method, it would set up a special entity specifically for this project that would buy the plant. Investors would lend money to the special entity, in return for lease payments, in lieu of interest, for the term of the deal. At the end of the term, the principal is returned to investors, and the project becomes the property of the company.
Another way to avoid paying interest, at least in name, is to form a joint venture called a musharakah. The joint venture partners buy Islamic bonds and receive a percentage of profits over the term of the loan.
Malaysia has used the deferred payment sale principle of bai' bithaman ajil. A bank buys an asset on behalf of a customer, then sells it back later for a profit. However, bai' bithaman ajil, is not acceptable to the Middle East, which has a different interpretation of Shariah, so Malaysia has been promoting financial structures that are globally compliant and can be included in the global Shariah stock indexes. Standardization also helps to reduce the cost of developing and marketing Islamic bonds.
To gauge the safety of Islamic bonds, the Islamic International Rating Agency has developed the credit-rating Shariah Quality Ratings.
Custody banks provide custodial services, which includes trade processing and clearing, and fund accounting and administration, for investment companies, brokerages, and institutional investors. With companies becoming more global, custodian banks have expanded their services to include foreign-exchange trading and securities lending. A global custodian bank can help with the different regulations and accounting practices in other countries, as well as currency conversion. Custodian banks are also handling different assets, including derivatives, real estate, and private equity.
The main reason why ETFs are not actively managed is because the fund manager would have to reveal what he is buying or selling, thereby allowing traders to trade ahead of the ETF company for greater profits and at a greater cost to the company. This article is about a company trying to circumvent that problem to create the 1st truly actively managed ETF. The solution to the problem was not revealed, however. However it will be done, it will certainly increase expenses above the typical ETF.
Many states are enacting laws, to prevent identity theft, that allow consumers to freeze access to their credit reports without their explicit authorization, which extends to almost any anyone wanting access to someone else's credit report, including credit card and cellphone companies, although consumers may have to pay a fee ranging from $5 to $20 to each credit reporting agency that issues a credit report, and another charge to unfreeze it, which can take up to 3 business days.
Half of the states have passed or are considering passing credit-freeze laws. Kansas, New York, Oklahoma, Utah, and Wisconsin have recently enacted credit-freeze laws. California was the first, but some portions of its law have been struck down by an appeals court, which affects only California, but challenges are likely elsewhere, as more states pass it, and enough time passes to mount challenges. 5 states allow only identity-theft victims to freeze access to their reports, and some states allow victims to freeze their accounts without paying a fee.
The big disadvantage for the consumer is that credit and other services that depend on credit checks may be more difficult and time-consuming to get.
Naturally, the finance and retail businesses oppose credit-freeze laws because of the burden on them. They argue that a consumer can place free, 90-day fraud alerts on their credit file, which requires the business requesting a credit report to verify the identity of the consumer. However, consumer advocates argue that fraud alerts are rarely effective.
Many people, as authorized users, have company credit cards to pay for business expenses. Sometimes the people pay the monthly bills themselves, and sometimes, especially for smaller businesses, the company pays the bill. However, an authorized user's credit score can suffer if the card payment is late, even if the company pays the bill.
Goodwill is an intangible asset, the value of which is recorded on the acquiring company's balance sheet as the difference between what it paid for the acquisition and the acquired company's fair market value, or book value.
Goodwill of a Company = Purchase Price - Book Value of Company.
Goodwill is no longer amortized, but, to comply with FASB Rule 142, Accounting for Goodwill and Intangible Assets, it must pass an annual impairment test, to determine if the goodwill is still worth what was paid for it. If not, then it has to be written down, which will diminish stockholder equity, and may trigger covenants on any debts that the acquiring company has issued, and thus, imposes a risk for current stockholders. Such is the current case with Expedia, as is illustrated by the above article.
The following amendments to the Bankruptcy Official Forms are effective for cases filed after October 1, 2006:
| Official Form l, Voluntary Petition Form | Committee Note |
| Exhibit D to Official Form 1, Individual Debtor's Statement of Compliance with Credit Counseling Requirement (new) Form | Committee Note |
| Interim Bankruptcy Rule 1007 (Lists, Schedules, Statements, and Other Documents; Time Limits) |
| Official Form 5, Involuntary Petition Form | Committee Note |
| Official Form 6, Schedules of Assets and Liabilities Summary of Schedules | Committee Note |
| Official Form 6D, Schedule D Form |
| Official Form 6E, Schedule E Form |
| Official Form 6F, Schedule F Form |
| Official Form 6I, Schedule I Form |
| Official Form 6J, Schedule J Form |
| Official Form 6, Declaration Form |
| Official Form 9, Meeting Creditors Notice Form | Committee Note |
| Official Form 9G, Chapter 12, Individual or Joint Case Form |
| Official Form 9H, Chapter 12, Corporate Case Form |
| Official Form 9I, Chapter 13 Case Form |
| Official Form 22A, Statement of Current Monthly Income and Means Test Calculation (Chapter 7) Form | Committee Note |
| Official Form 22C, Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Chapter 13) Form | Committee Note |
| Official Form 23, Debtor's Certification and Completion of Instructional Course Concerning Financial Management Form | Committee Note |
Amended Director's Procedural Form 104, Adversary Proceeding Cover Sheet, and Form 210, Transfer of Claim Other Than for Security, will be effective as the bankruptcy courts implement CM/ECF Release 3.1. Most bankruptcy courts are expected to have implemented Release 3.1 by October 17, 2006. New Director's Procedural Form 202, Statement of Military Service, and amendments to Director's Procedural Forms 240, Reaffirmation Agreement; Form 271, Final Decree; and Form 281, Appearance of Child Support Creditor or Representative, were effective on August 1, 2006. The forms are available at http://www.uscourts.gov/bkforms/index.html
Form 104, Adversary Proceeding Cover Sheet (10/06) |
Form 202, Statement of Military Service (new) |
Form 210, Transfer of Claim Other Than Security (10/06) |
Form 240, Reaffirmation Agreement |
Form 271, Final Decree |
Form 281, Appearance of Child Support Creditor or Representative |
CAPS is a free stock-rating forum just introduced to the public by the Motley Fool, that rates stock pickers from individual investors to big brokerages, research boutiques, and stock-picking mavens like James Cramer.
Participating investors predict how a particular stock will do compared to the S&P 500 over a specific interval of time. They are then rated in proportion to how correct their predictions were, and how the returns fared against the index. A participant is assigned a rating after predicting the performance of at least 7 stocks.
Individual stocks are also ranked, using a 5-star metric, by the participants. Only participants that have a rating can influence the rating of a particular stock, and the effect on the stock's rating will be proportional to the participant’s rating.
To rate the predictions of Wall Street firms and famous mavens, the Motley Fool relies on data provided by Briefing.com for analysts’ recommendations, and compares them to actual performances.
Thus, individual investors can see how well they’ve done compared to the big boys, and how well the big boys actually do.
Many states are passing laws that allow car dealers to charge higher prices for the paperwork involved in selling a vehicle, such as preparing registration, titles, and license plates. Currently, 30 states have no caps on such fees, allowing dealers to add on charges that were not advertised or negotiated. Such fees, often called documentary fees, or doc fees, average $400 to $700 in states that have no fee caps, and in some states, there could even be a sales tax on top of the fees.
In many states, these fees don’t even have to be disclosed, and oftentimes, the amount charged is considerably greater than the amount of work warrants. In many cases, the customer only has the chance to see the fees just when signing the contract, when many customers would be reluctant to negotiate or question further, or worse, yet, they would just sign the contract without reading it.
Car dealers argue that higher fees are necessary to comply with the Gramm-Leach-Bliley Act that requires dealers to have a plan to protect customers’ privacy and to implement it. Other laws require that dealers check customers to see if they are listed as potential terrorists, and dealers must be able to verify that such checks were done. However, it is difficult to see how these would significantly increase costs.
Other fees that may not have been explained or negotiated in advance, or included in the documentary fees, include vehicle prep fees, for cleaning and inspecting the vehicle; finance markups for handling the financing, which may be up to 3% of the loan amount; and dealers often add large markups to extended warranties and accessories because customers rarely shop around for these items. Extended warranties, in particular, are rarely worth any price, because they only cover what is not likely to fail, and rarely cover things that are far more likely to need repair.
Hidden fees, of course, have always been an effective way for a seller to increase profits without having to advertise, or even mention the fees, in advance. An effective way to eliminate the fees is to turn the tables. At the closing, the dealer is expecting the customer’s signature on the sales contract, so the customer can demand that the fees be rescinded, or he won’t sign the contract. That should force most car dealers to deal.
Destination clubs allow members to vacation at a variety of properties at various places in the world—like time shares for several properties, but without the ownership or the maintenance. Large refundable deposits, sometimes to $3 million dollars or more, are required in addition to annual dues to cover operating expenses. The deposits are used to purchase the real estate, which helps to protect members' deposits. The company profits by taking some of the deposit as income and from real estate appreciation. Some companies give their members a stake in the real estate and to some of the appreciation, and, thus, are sometimes known as equity clubs.
However, the companies that run these clubs are unregulated, and people could lose their hefty deposits if the company goes bankrupt, especially if the company rented properties instead of buying them, as Tanner & Haley Resorts did. People would be wise to investigate the company thoroughly before depositing any money, and to make sure that the company is buying real estate with the money. Avoid companies that refuse to provide financial statements or cannot provide verification of the company's ability to refund deposits. To protect members, Ultimate Resort is putting deposit money into a trust and makes the members secured creditors, and Quintess is planning on making members secured creditors to the real estate, and is giving members access to its quarterly, audited reports. In both cases, if the company does go under, the members claims will only be subordinate to the mortgages on the real estate.
Find out more about fractional ownership here: Luxury Fractional Guide - Info on Fractional Ownership Real Estate and Fractional Vacation Ownership
There is an unusual way to improve someone's credit score by making that person an authorized user of a card where the legal owner of the account has a long and good payment history with that card. The reason why this works is because Fair Isaac—the company whose algorithm for determining credit scores, called the FICO score—treats the entire payment history as if it was the authorized user's own credit card. Thus, this is a good way to quickly raise the score of children who are starting to use credit, or for family members or friends emerging from bankruptcy.
The disadvantage for the legal card owner is that the authorized user might run up excessive charges on the credit card, especially since the user has no legal obligation to pay the bill. However, it has been suggested that this can be prevented by making the person an authorized user, but not giving him a card or the card number so that he can make charges, although what is to prevent an authorized user from learning the account number by getting a copy of his credit report? Nonetheless, it will still improve the authorized user's credit score.
There are some websites, such as Seasonedtrades.com and Creditlaunchers.com, that charge $1,000, or more, for this benefit. These websites also offer other credit services as well, although I don't know if they would be in the best interest of those seeking to rebuild their credit. Indeed, advertising the raising of credit scores may simply be a way to attract credit seekers to their other services. To pay so much money to raise one's score is a good indication that the p