“The Sensation with Inflation”

There is a lot of confusion as to where we are headed right now so I thought I would break down the different flations and maybe we can all decide which one is the fit right now.

Inflation is a where your currency buys less due to a rise in the price of goods and services; accordingly, inflation is the erosion in the purchasing power of money. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won’t be able to purchase as much with that dollar as he/she previously could.

What cost $29,900 in 2000 would cost $37031.75 in 2008. Also, if you were to buy exactly the same products in 2008 and 2000, they would cost you $29900 and $24235.11 respectively.

As a harbinger, gold recently rallied above $1,000 an ounce and many experts think that this is partly due to the Fed’s continued money-printing campaign over the past year will cause the dollar to weaken even further than it already has.

That’s putting upward pressure on other commodities. Oil is trading around $71.50 a barrel, an increase of about 20% over the past six months. The prices of sugar and copper have shot up.

Deflation: A decline in price levels caused by a decline in the supply of money or credit. Deflation often includes the side-effect of enlarged unemployment because of the lower demand for goods and services in the financial system.

Stagflation: High inflation and high unemployment occurring simultaneously.

Taxflation: aka bracket creep the gradual movement of income into a higher federal income-tax bracket as a result of wage and income increases intended to help offset inflation. It can also affect the liquidity of an estate by increasing the estate tax burden.

Example – single person with estate worth $5,000,000 and in 2009 that would cost the estate $1,200,000 or represent shrinkage of 24%.

If they pass away in 5 years or 2014- and was growing at 8% per year. The estate will have grown to approximately $7,346,640.38 the federal estate taxes would be $3,893,719 and represent shrinkage of about 53%.

It looks like we have a combination of them all but I would say Taxflation and stagflation are a good fit but it really is anyone’s guess.

Tax Free Retirement Cash Flow

Overfunding is a strategy that focuses on accumulating cash in the policy rather than paying for the death benefit which is the payout to your loved one’s when you pass away. This approach leverages the highest policy premium that is allowed with the lowest life insurance death benefit so that your cash accumulation exceeds your policy net insurance costs over at least 10 years. There are fundamentally 4 steps to determining the combination of maximum premiums and minimum death benefits necessary to selecting the most leveraged indexed universal life policy:

4. Finally, you must pay close attention to the maximum premiums allowable under the  Internal Revenue Code which is referred to as the seven-pay premium limitation.[1] As long as the total premiums for any seven-year period are equal to or less than the maximum allowable premiums for the seven-pay test,[2] you’ll be able to access the cash values in the policy at any time, tax-free and relatively liquid.

In essence, a life insurance contract that fails to meet the seven-pay test will be classified as a modified endowment contract (MEC). The seven-pay test is not met if the accumulated amount paid at any time during the first seven years is more than the total of the net level premiums that would normally have been paid on or before such time if the contract provided for paid-up future benefits after payment of seven level annual premiums

Want to see if this is a fit for you? If you’re healthy it may very well be a great tool in your arsenal to slay the bailout dragon for your retirement.

“Buying Foreclosure Without the Exposure”

Start your retirement planning early

Real estate investing is exciting because we get the opportunity to use wealth pillars like leverage which allows ordinary people the ability to considerable wealth in a short time; I know because I’ve seen it happen. Another exciting aspect is there are always opportunities to make strong returns, regardless of how the market is doing and right now that is especially true as we bear witness to hundreds of thousands of foreclosure nationally per month. But like other forms of investments, real estate investing takes discipline, education and smart decision making to become successful. I’ve met with clients who made impulse purchases and the result is usually disaster.

There are fundamentally at least eleven reasons why real estate deals are always available no matter what the real estate market is doing. There is no magic here, just human circumstances that create opportunity if you know how to look for them.

1. Divorce
2. Job loss
3. Job relocation
4. Bankruptcy
5. Health problems
6. Incarceration
7. Reduced income – market conditions
8. Death
9. Failed business
10. Military duty or activation
11. Adjustable rate mortgages – on stated income that was unreal

Right now all eleven of these personal circumstances are widespread since American is in two military conflicts, unemployment expands monthly, record business failures and layoffs and numerous professional incomes reduced due to market conditions. In my own practice of modifying loans I see that there was a serious abuse of the stated income loan that has now come to boil and are popping left and right leaving folks unable to make the payments. The inability to make adjusted payments should be no surprise as there was no way for them to ever afford the home with their current income.

Enter the REO. An REO (real-estate-owned) is a form of distressed property and is similar to buying a short sale (sale of a home for less than the owner owed), except the property is already back in the possession of the lender or bank through the foreclosure process. In an REO situation the banks end up owning the property when no one bids to cover the amount owed against the property at a public auction. REO homes are often considered the best way to buy a distressed property because the seller is already out of the picture. It’s just the investor or their agent, the bank or the bank’s agent negotiating the transaction. Some REOs can be purchased directly from the lender for pennies on the dollar especially for those who can buy them in bulk. However, if you combine the purchase of an REO with a system for investing where you don’t have to do anything but collect your checks then you can leverage your time and resources to make and find more opportunities.

Normally REOs are purchased on what is referred to as tapes and the more money you have to spend the better the tape but on these large tapes there are the good, the bad and the ugly which are properties that you wouldn’t want because the fix up costs eat into the profits. Also, to get really good deals or the actual pennies on the dollar you have to come in with millions if not billions the way the hedge funds do who typically have purchased most of the good deals by the time the individual investors or small investor pools can get a hold of the REOs. Nevertheless, there is an old fashion way of acquiring these properties if you have the time to fly all over to numerous states and get into the underground or you can rely on a systematized approach to investing in this distressed market where you’re able to not only get all good properties (bedroom communities), the system operators actually cherry pick and buy properties that are livable, fix them up bring you not only positive monthly cash flow from your systematized property but also has built-in exit strategies that put a cash windfall on top of your positive cash flow.

All the most successful business in America follows a system. Once you have real estate you are in business in a sense, you’ve become a real estate entrepreneur and why wouldn’t you want a system to take care of your investing? To make sure we understand what a system is specifically here is a great definition: System (from Latin systma, in turn from Greek systma) is a set of interacting or interdependent relationships, real or abstract, forming an integrated whole. The concept of an ‘integrated whole’ can also be stated in terms of a system embodying a set of relationships which are differentiated from relationships of the set to other elements, and from relationships between an element of the set and elements not a part of the relational regime.[i] Now this is just a very technical way of saying things that work together or “special sauce” if we were to look at Kentucky Fried Chicken (KFC™).

The system works like this, you buy the property, management places a new buyer in the home that will pay you the going rate for rent is in the area as their new mortgage payment to you, and you’ve just become the bank. For example, say rents at the local apartment are $500 and you only make $1,000 to $1,500 net after taxes. If I came up to you and said hey, “how would you like to own a home for $500 down and $500 per month,” the same you’re paying right now in rent, what would the reasonable person do? They are going to want to own and you have them on a land contract, no landlord/tenant relationship here so you don’t fix sinks, toilets or anything else…it is their home. You just hold this contract like the bank and are akin to the note which is reverse engineered at $500 at 10% time 10 years amortized. Did you get a deal? Of course you did and until this person repairs their credit so did they because we made it affordable just like a car dealer would…it’s all about the payment.

Management collects your $500 per month minus a 10% servicing fee for collecting and disbursing your money and making a website available to you on line where you can manage your property and check on it and see pictures both interior and exterior.

The lynchpin in this type of investing is the land contract. A land contract (sometimes known as a “contract for deed” or an “installment sale agreement”) is an agreement between the owner of a property and a person who wants to buy the property for an agreed-upon purchase price.

What are the Benefits of using the land contract you might ask? Well, there are plenty but they include, not having to fix anything, you don’t pay taxes or insurance, payments are predetermined and there are minimal liabilities (asset protection).

Finally, for the first time you have multiple exit-strategies inherent in your real property investment. I usually ask real estate investors that come in to my office two questions - #1 what is the exit strategy? And #2 did you buy retail, wholesale or discount? In both cases they give me a look like I spoke a foreign language at them. In this system these two threshold concerns are integrated because you have the exit strategies and you are definitely buying discount.

You or your new buyer could choose to refinance as it behooves them to get conventional financing which may be lower than structured in your land contract. For example, if you had an investment entry point of $23,900 and a $37,900 sales price fixed in your land contract. After a year of timely and seasoned payments the land contract Buyer’s credit is restored. Buyer can refinance property to lower interest rate and cashes out your $37,900 note which creates a high return on investment (ROI).

Alternatively, since you own this note you might choose to sell it to a note buyer. For example if you have an investment of $29,900 which you sold for $90,000 ($500 down@ $500 per month @ 12% interest) and after the loan seasons for 12 to 18 months you have the option of selling your note in a marketplace that is a trillion dollar industry. So you sell your note for $67,500 (25% discount). But you’ve also received the $5,400 in monthly income for the past year. The combined profit is in Excess of $40,000 or more with the monthly payments and the note sale even though it is discounted. That’s another hard to find ROI particularly if you’re accustomed to market returns from mutual funds and the like.

You can always just hold because you have an investment of $29,900 with a documented sales price of $60,000 via the land contract.

This system has been a huge success with waiting lists of approved applicants nationwide just waiting for properties to come available as the secondary buyers. We are watching this program transform families, neighborhoods and communities. In addition to the socially redeeming value of this program, it provides investors with massive advantages. Some of those include:

1.       Triple Net - Your buyer is responsible for taxes, insurance and maintenance

2.       Pride of ownership - Your buyer typically improves home and maintains well

3.       Lower Default - Owners paying the same amount as they would for rent rarely default

4.       Socially redeeming - You can help a hard working family become home owners

5.       Cash flow between $450 - $650 - for properties purchased all under $30,000.

The next five to ten years will be defining and you have the power to change your financial future if you only get off the sidelines and in the game. I played football in college and whether you were at a real game or a practice scrimmage, while you were on the bench at the sidelines you were helpless to change the outcome of the game. It was only when you got in the game and you knew you placed your entire being into the game that you hand control to change an outcome and in effect, you can only take control of your own personal destiny by getting in the game.

To prove the point that you can be more victorious in a down market you’ll want to take a lesson from the playbook of Floyd Bostwick Odlum. He has been described as “possibly the only man in the United States who made a great fortune out of the Depression.”

After struggling as a corporate attorney in Salt Lake City, Odlum received an offer to a law clerk at a New York firm, and in 1921 became Vice-President of his primary client, Electric Bond and Share Corporation.

About 1923, Floyd Odlum and friends along with their wives pooled together a total of $39,600 and formed the United States Company to speculate in purchases of utilities and general securities. Within two years, the company’s net assets had increased 17 fold to nearly $700,000. If Mr. Odlum got started with $39,600 during the Great Depression, can’t you get a few friends or family together and pool funds to get in on this once in a lifetime historical opportunity to purchase discounted REOs at a modern price-point of $29,900? We only see great declines once or twice in our lifetimes and who can predict the next one as this one came without warning; will you have done something by then?

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” — Thomas Edison, Inventor

Success Driver,

James Burns, Esq.

www.3pillarreo.com

(949) 440-3243

“Loan Modification or Complication?”

The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home’s current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

Officials said the standards for loan modifications should fast-track changes in payments. The standards will be applied to loans owned and guaranteed by Fannie and Freddie, but officials said they hope they will also be adopted industry wide.

“We expect that it could significantly increase the number of modifications completed,” said James Lockhart, director of the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie. …

Fannie reported this week that 1.7% of its mortgages by value are delinquent by 90 or more days. Fannie’s filings suggest that it has about 18 million mortgages on its books, which would work out to about 300,000 mortgages that could potentially be eligible. The borrower will ultimately be responsible for paying the full amount of the principal borrowed, but payment on part of the principal can be deferred to make the monthly payment affordable.

Homeowners who purposefully default on their mortgage to get a modification will not be eligible. Borrowers will have to submit a statement showing financial hardship or a change in financial circumstances, along with proof of their income. The modification will become final once a borrower has made three payments under the modified terms.

But even in cases where declining home prices have taken the value of a home to less than is owed on the mortgage, the balance of the loan will not be lowered under this program.

“This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers,” said Brian Montgomery, commissioner of the Federal Housing Administration.

The fact that mortgage balances will not be reduced for the so-called underwater mortgages — those in which a homeowner owes more than the home is worth — will limit the use and impact of the program, according to some experts.

However, there is a competing interest in getting modifications done and that is the investors who purchased these loans. Some hedge funds, including Greenwich Financial Services and Braddock Financial, told banks in October that they might sue the banks if they changed mortgages that were within mortgage bonds that the hedge funds had purchased. Modifying the terms of mortgages underlying mortgage bonds can change how much those bonds are worth.

Investor rules and underlying servicing contracts with respect to modifications are not uniform and may prevent us from doing modifications that would benefits borrowers and investors.

Under the plan, Fannie Mae, Freddie Mac and other mortgage firms will rewrite the terms on some overdue mortgages so the homeowners won’t pay more than 38% of their monthly income. Modifications could include deferring some of the principal owed, lowering interest rates or extending maturities to as much as 40 years. The process will be streamlined and uniform.

If you know someone in need of saving their home have them contact my office after downloading our questionnaire which should be faxed back to use…get it here .

James Burns, Esq.

Mortgage Meltdown – who’s to blame?

Many people have now looked to point a finger and fixed it on the Community Reinvestment Act, passed in 1977, which requires banks to extend loans where they accept deposits. It was created to combat redlining — the practice of denying loans to residents of minority neighborhoods. Conservatives have periodically criticized the fair-lending law, saying, for example, that it discourages banks from opening branches in poor districts. The latest controversy on these points began via a Sept. 15 editorial in Investors Business Daily, titled “The Real Culprits in This Meltdown.”

Contrariwise, Kenneth Thomas, author of two books about the law (”Community Reinvestment Performance” and “The CRA Handbook”). Thomas says you could just as easily blame the Sept. 11 terrorists (because the Fed slashed short-term interest rates afterward), or the Chinese (for buying so many bonds during the subprime boom). In other words, he thinks it’s a huge stretch to blame the CRA on lenders’ bad decisions.

Mr. Thomas espouses three reasons to exonerate the Community Reinvestment Act in the mortgage meltdown:

Why allegedly the CRA is not to blame

? The CRA applies to banks. Most subprime mortgages came from lenders that were not banks — so the CRA did not cover them.

? The non-bank lenders made more reckless lending decisions than banks did.

? Regulations didn’t drive the subprime lending boom. The pursuit of profits did.

I still think the enacting of the CRA is like loading the gun and even though you didn’t pull the trigger, you set the circumstances for someone to be hurt. I think those involved in this legislation should step up and take responsibility and admit they didn’t go far enough to examine the other side of the coin which was the potential for abuse and that it might get out in the hands of unscrupulous brokers; as if brokers just started in the business in 2000. There is such a symbiotic relationship between the bank and those who peddle the products or the investors (banks) that you are not kidding me when you act as if it is someone else’s fault.

No dah, the pursuit of profit drove the subprime lending boom…why wasn’t someone watching to prevent this and get additional regulation in early enough. When you see something booming you know it is going to get abusive so get proactive rather than were we are now which is reactive with a new deficit around $11.3 Trillion.

Sound off if you have any good ideas or analysis in finding a balance between helping struggling families of color or just struggling families and how to keep it from going haywire with abuse and greed.

James Burns, Esq.

Credit Card Wars

I’ve been predicting that credit cards would be the next financial branch to go on the offensive for risk management and start closing cards or cutting credit lines.

Indeed, credit card issuers are tightening lending terms with consumers to lower their risk profile, from cutting borrowing limits to closing dormant accounts and I’ve had a few clients already that have fallen victim to this pre-risk practice.

A survey of credit card industry executives in July found that 62 percent of their companies planned to reduce lines of credits because of economic conditions and risk mitigation, according to Javelin Strategy & Research.

While changing a customers credit limit is nothing new, representatives of the largest card issuers in the U.S., Bank of America, JPMorgan Chase and American Express, say they are increasingly cutting credit card limits for their customers because of the downturn and to avoid risk.

American Express routinely changes the credit limit of 20 percent of its customers every year, more cards are being limited or lowered than raised this time around, according to Kim Ford, a spokesperson at the company. This year, only one out of two customers saw an increase, versus four out of five in the recent past and they had excellent credit and payment history.

Ford says it reflects a change in the criteria used to assess riskier customers, factoring in such things as whether the card holder has a subprime mortgage, the geographic location of the home and whether home prices are falling in that area. We can only imagine how they view California right now as the earth drops all the way to China in terms of housing prices.

American Express is not alone. “We’re working more aggressively to control risk,” said Betty Riess a spokesperson at Bank of America , adding the company is also closing accounts of customers that have had a zero balance for over a year and have a riskier profile.

A spokesperson at JPMorgan Chase stated the bank is positioning itself by taking a second look at riskier customers as a result of economic conditions.

Like much of the credit crunch, the changes may mean little to those with the best credit or those who spend and borrow judiciously and pay off their monthly balances. But if you get caught in that financial quicksand, you could go down without a rope and have it adversely affect your credit score.

Accordingly, cutting credit limits or closing accounts can have a negative effect on a consumer’s credit score, or FICO, says Liz Pulliam Weston, a personal finance columnist and author of “Deal with Your Debt.” That’s because one way credit scores are calculated is by looking at the debt-to-available credit ratio. The closer the debt to the credit limit, the lower your credit score.

A credit limit reduction, for instance, can lower your credit score by 30 to 50 points, says Weston.

With lower credit limits, cash-strapped consumers, will have less of a back up— and in some cases none at all—when things get tough.

“It’s going to, in turn, effect discretionary spending,” says Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research.

What should you do?

Pay Attention

A change in credit lines or account closures will be communicated in writing. Woosley says consumers should check online statements as well as regular mail, as some of the notices can look like junk mail.

“You should know your credit score by checking it at least once a year, says Weston. I like and personally use myfico.com, as it comes from the folks who created FICO and is the most reliable in my opinion.

Appeal The Decision

If you get a notice saying your credit limit is being reduced, you can call up or write the company and try to reverse the decision, especially if you feel your credit score is in good standing. Sometimes, mentioning the possibility of changing card issuers can help. “Consumers still have some power,” says Weston.

Use Your Card

If you have a dormant, or inactive, card—one with a zero balance on a regular basis—use it for small purchases, recommends Kaplan. “It might be a good idea to go out and use it, so it doesn’t look like it’s sitting there unused,” she said.

Don’t Miss Payments

An obvious piece of advice, but worth repeating, try to pay your balance in full every month, avoiding interest and finance charges.

Companies are less likely to take action “if you have good credit,” says Kaplan.

Seek Credit Restoration

We assist consumers with credit restoration so you can contact my office as we’ve been successful in removing derogatory reporting and using the law to ensure that the reports are accurate as it is suprising how many times it is not.

Loan Modification and Foreclosure Avoidance

Usually if there is one financial situation there is another and we can help you get a loan modification that will free you from the bondage of a high interest rate that can totally sink you and your credit and once you’re credit is ruined it takes close to a decade to get it back without help.

James Burns, Esq.