As our economy slowly recovers, many investors are concerned with recouping the money they lost during the crisis. Pulling your funds out of investments all together will do nothing to bulk up your savings, while sinking your money into risky funds can do further damage. So, with black-and-white options not offering solutions, where can investors put their money to work?

Many investors are turning to investments that they feel are safe, such as bank CDs or money market mutual funds. The problem with these “safe havens” lies in the low returns. “The average money market fund yields .05 percent, or $5 on a $10,000 deposit.” With rates of return this low, these investments may not be able to keep up with inflation, let alone fill the gaps left by the losses experienced over the last 24 months.

Another option is to do nothing. Yvon Chouinard, founder of the Patagonia sports outlets, says, “There’s no difference between a pessimist who says, ‘Oh it’s hopeless, so don’t bother doing anything’ and an optimist who says, ‘Don’t bother doing anything, it’s going to turn out fine anyway.’ Either way, nothing happens.” The idea of holding on to your portfolio “as is” and wishing for the stocks you currently hold to rebound may work in some instances. But, if time turns out to be your enemy, your retirement years will be funded only by the amount you currently have, minus the effects of inflation.

As investors actively search for ways to re-energize their portfolios, many are returning to real estate. The real-estate market is hovering around the bottom, interest rates remain near record lows and a large inventory gives buyers an abundance of options. On the residential side, many foreclosures and bank-owned properties can now be purchased for a fraction of their value. The same opportunities are becoming available in commercial real estate as owners are unable to pay off or refinance their loans.

As I have mentioned before, real estate can help your portfolio win the battle over inflation. Real estate’s value will return over the next couple of years. When it does, those who invested now will not only recoup their losses, but they will also have the possibility of dramatically increasing their portfolio’s value.

Shaking Our Stone Age Tendencies

Letting our emotions dictate our investment decisions is a risky behavior. Out of instinct, we all get emotional when we earn or lose money. It is in our wiring to feel connected with the money we have accumulated. We tend to panic when our money is in jeopardy.

We make a connection between money and safety. Psychology suggests that we are programmed to protect our safety the same way our ancient ancestors were. Even though we encounter vastly different problems than our ancestors did, we still attempt to solve them in the same way. Moving with the herd used to be crucial to staying alive. Today however, moving with a herd of investors can weaken your portfolio. Pushing money into an investment simply because the majority of others are is usually the exact opposite of what you should be doing.

In the same vein as the herd behavior, is our tendency to make investment decisions based on past success. Just because a strategy worked in the past does not necessarily mean it will work in the present. Markets change dramatically from week to week. Strategies you used in the Dotcom boom of the late nineties may lead to an unpleasant outcome in today’s market. Sticking to market fundamentals is one thing, but taking on blind risk a second time because it worked out the first, is nothing more than a gamble. It is the same concept behind betting on red because the roulette ball fell in a red pocket the previous spin. No matter what your past performance, prudent due diligence is always necessary to gauge the current market trends, analyze risk and make sound investment decisions.

I have encountered a number of studies that suggest we remember the bitter feeling of losing money more acutely than the feelings we have when we earn the same amount in an investment. A few lousy investment decisions and an investor can be turned off indefinitely. It is important to learn from our mistakes and use the knowledge to our advantage. Our emotions can lead us to make decisions that, in hindsight, are horrible ideas. A bad decision is bad no matter what the outcome. Making money out of an emotional decision is lucky, but the decision itself was still the wrong one.

There is no way to completely escape our tendencies to invest based on emotion. But, by being aware of the negative impact our emotions have on our investment decisions, we can limit their influence. Wise approaches such as hiring investment professionals, practicing prudent due diligence and planning sound exit strategies can all help us become better investors.

Bank Closures v. the FDIC

Last week, federal regulators seized seven more banks- three in Florida and one each in Georgia, Minnesota, Illinois and Wisconsin. The bank failures brought the year’s total to 106, which is the most since the savings and loan debacle brought about 181 failures in 1992.  Plus, with 416 banks on the FDIC’s watch list, the number of bank failures is expected to rise before the end of the year. With bank closures quickly absorbing millions of dollars from the FDIC’s Deposit Insurance Fund, is it possible that our savings accounts are realistically still protected?

The FDIC operates like a basic insurance policy, except banks are the customers instead of individuals or groups of individuals. Banks pay insurance premiums to the FDIC in exchange for its commitment to protect their depositors’ money. In the late 1920s, when banks closed at an alarming rate, depositors had no protection from bank failures. Between 1929 and 1933, banks lost an estimated $1.3 billion of their customers’ money. Today, the FDIC protects several trillion dollars worth of deposits. But as of June, it only had $10.4 billion in its deposit insurance fund—down from about $45 billion earlier this year.

The FDIC’s reserves have quickly depleted as the cost of bank failures outpace the fees the corporation collects. Last month, as bank closures continued to mount, the FDIC’s board of directors considered four ways to bulk up the insurance fund. The options considered were: borrow from healthy banks, borrow from the treasury, levy a special fee on banks or collect regular premiums early.

Borrowing from healthy banks would reduce the amount of money available to the private sector. Borrowing from the Treasury could send the wrong message to the public and have adverse effects on the banking industry. Levying a special fee on banks could push those on the edge into failure. The last option, albeit not particularly attractive either, is to collect regular premiums early. Deciding to follow through with this option, the FDIC stated it “adopted a Notice of Proposed Rulemaking that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.” The press release indicated that the FDIC estimates prepayments will total approximately $45 billion.

Once approved, the proposed prepayments could give banks a bill for three years of premiums by the end of this year. While the requirement would put banks in a tough situation, the FDIC does not seem to think banks will find it too cumbersome. The FDIC believes that “the banking industry has substantial liquidity to prepay assessments.” As stated in the press release, “As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances, or 22 percent more than they did a year ago.”

The FDIC does have the capability to protect our deposits. However, initiatives that charge banks three years’ worth of premiums at once could help the FDIC weather an onslaught of bank closures without requiring the government to print more money…I hope. 

All My Best,

Thomas J. Powell

I decided to start anew with more refreshing thoughts. So, I turned to a medium in which I had some control over the information that was presented to me: Google. Two main pages topped the list when I searched for the words “Economy: We Are the Answer.” The first was an informal Yahoo Answer Board on which the following question was raised: “Is there hope for the American economy or should we just drastically change the way we live?” The user went on to define “drastically change” by giving up our private houses and cars. The second most-popular page that appeared was BarackObama.com, which suggests no one within Google’s reach really believes we the people have the capacity to be the answer to our economic problems. According to my Google search, the answer either rests in the hands of President Obama or we will all be forced to live in communal frat houses without automobiles.

When our economy is running smoothly, we all welcome the opportunities to be part of a do-it-yourself world. We bag our own groceries, scan our own documents, rent our own movies and print our own boarding passes. On a weekly basis, we all most likely take it upon ourselves to deposit, track, clean, swipe, dry, spray, refill, bus, organize, pour, dispense and scan in the presence of other do-it-yourselfers in the vast public. As long as the tasks are minimal and the goal is clearly in view, we are encouraged to do everything ourselves. The responsibilities we used to let others handle, we now do ourselves (I cooked my own meal at Melting Pot earlier in the month). About half of the times I visit a gas station, there is no reason for an attendant to be present—unless I am in Oregon or New Jersey, where state officials prohibit me from pumping my own gas. But, when an issue has options that are more complex than selecting diesel or regular, our individual accountability takes a vacation. Why do we turn our focus to other superpowers to take control and eliminate ourselves from the equation?

The Problem is Passivity                               

This economic downturn is nothing more than a collection of intertwined problems. Although financially painful and physically overwhelming, there is no reason for any of us to hide underneath our desks and wait for the shaking to end. Think about the steps we all take when trying to overcome a timely problem—for an example, a clogged drain. We take a short period of time to analyze the situation. We look at all the factors involved and ask ourselves crucial questions: Is the water draining at all? Is the clog causing the pipes to leak? How severe is the leak? Is it causing immediate damage? Next, inevitably, it is human instinct to search for the quickest fix. We switch on the garbage disposal and rub our lucky rabbit’s foot. When we are forced to take real action we must recognize the weapons we have to combat the problem (a plunger, a drain snake, Drain-O). After we extinguish our resources, we then consult the knowledge of an expert. 

Now consider the enormity of our current economic struggles. The formula for dealing with the problem is much more complex, but it should still follow the basic fundamentals. Why then have droves of investors been complacent to listen to long-winded “experts” before analyzing their situation and deducing what it is that they can do for themselves? The formula is flip-flopped when we let ourselves believe that any given problem is too big or too complex. Remember the old adage, “We can only eat an elephant one bite at a time”? Many of the intricacies of this recession are out of our control, but the sooner we take control over the issues we can influence, the sooner the complex problems begin to untangle.

If the severity of the problem is directly proportionate to the amount of time we take to analyze it, then we only need a brief moment to stare into a clogged drain. In that same vein, our economic crisis is much more complex and has required a longer period for analysis. I argue we have passed this stage of the process and action is required now. This summer brought about a number of signs that suggest we are now slogging around somewhere near the bottom. With home-improvement projects, summer vacations and outdoor entertainment, consumers typically spend more in the summer months. We are now entering what is destined to be a difficult autumn. Unemployment will continue to strain on families, foreclosures will mount and consumers will tighten the belts they let momentarily loosen over the summer.

On the other hand, as the leaves turn and nature gets stripped of its color, a buckled economy will continue to present opportunities for us to take action. It is time for all of us to stop viewing ourselves as helpless observers and again consider ourselves part of the equation. In some ways we already are important variables, but we rely on the inadvertent action we take to be sufficient. How many times have you heard an angry citizen blurt out something along the lines of “I do my part, I’m a taxpayer”? The somewhat-passive action of paying taxes funds many integral economic systems in which our country balances itself. Just as we hire plumbers to help unclog our drains and keep them running smoothly we elect (read “hire”) officials to help unclog our economy and keep it running smoothly. With our plumbers, we are responsible for paying the bill to enable them to do their job. The same is true for the officials; by paying our taxes, we essentially all pick up our share of the bill and expect them to do their share of the work. Without our capital, their positions would not exist; but this hardly means we have positioned ourselves as active parts of the recovery.

Investing to Make a Difference

To be an important cog in the recovery machine, we must put our money to work. Our money does not do any good stuffed in a mattress or buried underneath the deck. Private capital built this country and there are few economic problems that private capital cannot solve, if allocated effectively. During the Great Depression, a time when the economy constricted and the majority of construction projects were put on hold, the entire construction of the Empire State Building was completed. Thanks to funding from its principle backer, an automobile tycoon aiming to one-up a major competitor, the Empire State Building was constructed with staggering momentum. During the Depression, building materials were cheaper and workers were eager to earn a wage, much like today. The construction put people and money back to work in dire times; not to mention the mystique the building has given our country for nearly eight decades.

A project as grand as the Empire State Building might only come around once a century, but that does not rule out the need for quality projects in our own communities. When private capital teams with quality-managed projects, the outcomes can be extraordinary. But, you need both. Whereas quality projects cannot get off the ground without capital, poorly-managed projects get ran back into the ground even with all the capital in the world.

This recession has torn through our communities and left a stockpile of quality real-estate projects to collect dust. Without proper funding, the projects remain undeveloped, unproductive and severely underemployed. Placing our private capital into quality projects will bolster the number of available jobs in our communities and get people behind a meaningful cause. There are loads of individuals that could be taking charge and becoming part of this recovery. We will show great resilience when we, on our own, come out of this strong, super-charged and feeling part of something.

We have to put the days of excuses behind us. We should be searching for any project that someone says “can’t be done” and aim to defy. When the newspapers have stopped reporting stories that highlight economic blemishes, our unemployment numbers are approaching all-time lows and our government takes a permanent vacation from bailouts; we will only vaguely remember our current doubts. We will, however, remember the period of time when we all did our part to restore communities. We will remember the turning point when we took action to pull ourselves from the painful times and regained our spot as part of the equation.

            Many companies involved in financial services cower when an official of any stature mentions the threat of national regulation, but Allstate has decided to embrace it. Since late April, Allstate has been pushing an advertising campaign that is rooted in support for creating a national regulation agency for all players in the financial industry, including insurance companies. Each ad in the four-part series, which runs in major magazines such as The Atlantic, touts the common theme of calling on “Congress to act boldly and quickly in drafting strong, comprehensive and clear federal regulation.”[1]

             Under the current system, insurance companies are regulated on a state-by-state basis, something that Allstate CEO Tom Wilson thinks needs be changed. In a national press release, Wilson argued:

 The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures.[2]

            Allstate’s push for a national regulation system is bold. The campaign appears to be having an impact as the Obama administration has started tackling a number of vital decisions that could ultimately lead to national regulation for all financial services. President Obama himself may not have been directly affected by Allstate’s campaign, but according to PRnewswire.com at least one Congressperson has received more than $20,000 in campaign contributions from Allstate over the past four years. Clearly Allstate has identified the potential benefits that would come bundled with national regulation.

            One group that stands to be trapped and bound by the regulatory net of a national system is the stock brokers on Wall Street. The Obama administration has proposed a plan that would hold brokers to the stricter fiduciary standards of registered investment advisors. Under this plan, brokers would be required by law to act in their clients’ best interests, not their own. Also, with each piece of investment advice, brokers would be obligated to disclose what they stand to gain personally. A plan to implement a complete regulation overhaul is sure to be cumbersome and will take time to be implemented effectively. The Obama administration would be wise to have patience with this reform and comb through all of the complexities before attempting to have anything signed into law.

 At the end of the day, the federal regulatory overhaul will aim to force those in the financial system to be more transparent, something the Allstate campaign clearly addresses: “Only when there is transparency around valuing the risk in the financial system—including the role of insurance to help mitigate that risk—will we regain confidence in the economy.”[3]           

To view all of the Allstate advertisements in their entirety, visit allstate.com/fedreg.

Commercial Real Estate’s Role in the Next Bailout

            Banks have had little to celebrate over the past 20 plus months. Still dizzy from the debacle caused by residential real estate, banks nationwide fear the devastation that could soon be unleashed by the rising number of foreclosures in commercial real estate.

            The banks which provided the money to build endless numbers of commercial buildings originally did so because they, like so many others, believed occupancy and rent rates would always consistently rise. But, many owners of commercial buildings are now fueling another wave of foreclosures because they are not able to generate enough cash from tenants to cover their principal and interest payments. Because the loans have also been bundled and sold on Wall Street as commercial-backed mortgage securities (CMBS), the foreclosed buildings spark a ripple effect. Anticipating the severe consequences this could have on our economy, the Federal Reserve is struggling to contain the situation and prevent the need for a second wave of bank bailouts.

            According to Deutsche Bank, about $153 billion in loans that make up CMBS will come due by the end of 2012. The vast majority of these will not be eligible for refinancing through their lenders because the values of the properties have dropped so dramatically.[4] The losses will potentially cripple not only the owners of the commercial properties, but also anyone holding CMBS. Furthermore, because CMBS typically help drive pension and hedge funds, the pain will be widely spread.

            The only positive side of this mess will be the number of affordable investment opportunities for those looking to get into commercial real estate. Commercial real estate does perform in the long haul. But, because of the onslaught of new commercial buildings that sprouted in recent years, we are now experiencing an uncomfortable rebalancing of the industry. Loans that were made on loose credit and then bundled by Wall Street into dicey investment vehicles are all being exposed. However, the underlying properties are not rotten; they still make for sound investments.

            Like the residential market, the commercial real-estate industry was saturated with quick deals that turned sour because they were not thought through. Now, because the consequences stretched so far, the commercial real-estate industry has to be turned upside down and untangled. Although the untangling process will be turbulent, it will also be exposing an array of investment possibilities. Commercial real estate provides the venues for consumer spending. As the economy slowly recovers, so too will the demand for prime commercial real estate—something that will be readily available and reasonably priced in the immediate future.  

Keep Health Care in Our “Best Interest”

            I have been reluctant to bring the argument of national health-care reform to the Powell Perspective because it does not necessarily pertain to real estate, finance or investing. But, national health-care reform has the potential to have drastic impact on our economy, and for this reason I believe it deserves attention here.

            I have been convinced to raise this issue after overhearing a 20-something at the gas pump discuss the issue with someone of similar age. “Man, the whole thing is no big deal, I mean how often do we really go to the doctor anyway?” he said. As I drove off, I realized that the young man, healthy and probably feeling somewhat resilient, was simply not interested in the topic. He wanted to be able to disregard the topic so he could have more attention to focus on the issues that had a more immediate impact on him.

            This week will bring an important turn in the debate over national health-care reform. The Obama administration has committed itself to rethinking the plan before the President is scheduled to address Congress on September 9^th. President Obama is now going to be leading the arguments that he has been able to mostly sidestep thus far. What has me concerned is that the administration will recognize what I did while pumping my gas: The youth do not care. If the Obama administration addresses this and rebrands the issue to somehow get the youth behind it, then the approval rating for health-care reform could skyrocket. The same demographic that helped the President win the office, could now help direct a national issue that they may not be truly interested in for another 20 years. On the other hand, maybe it is time to address the demographic who will still be paying for this change long after we are gone. After all, the people that currently have a vested interest are at a standstill after becoming equally heated on both sides of the issue.

            Since its appearance in the Obama administration’s limelight, health-care reform has done nothing but become more complex. The plan is unclear. No one knows what it will look like, we only know what the media reports: We’re currently 37^th in the world in health-care quality. Death panels will dictate how long we live. The President will personally pull the plug on our grandma. If there are details to this administration’s plan, then they have all been shadowed by heated talk show hosts’ attempts to get the public screaming about something no one knows about.

            On September 9^th President Obama is going to be forced to add some structure to his administration’s plan. Thus far, no one has been able to dissect and discredit the plan because it has only taken shape through various town hall meetings and informal gatherings. In his first address to Congress since February, President Obama will be talking exclusively about health care. This national issue is going to take rigid leadership from the President. If he wants to make any progress he is going to have to involve the nation by getting the young to care and the old to stop shouting at one another and listen.

Every day, and every minute somewhere on the Web, another statistic that hints at an economic recovery is reported, copied, translated, manipulated and reevaluated. It seems for every positive up tick in economic numbers, there is also a negative. We have been experiencing shaky times for the past 20 months. Every sector is not going to at once join together on an all-knowing graph somewhere and move together as one gradually-rising black arrow.

Stats are meant to give us market indication. “Experts” on the economy make sense of the stats by attaching other positive attributes to them without any solid proof. In social psychology, it is similar to how the halo effect works: If I see Bob Somebody helping an old lady cross a busy intersection, then I automatically believe Bob to be a good person; without having any solid proof. Helping the elderly in dangerous situations is good, I saw Bob do that, so Bob must be good. Similarly, the media tells us recessions are scary and bad, positive things do not happen in recessions; therefore a positive up tick in one sector must mean we are out of the bad recession and into the good recovery. Experts link good news with other good news without any solid proof.

Earlier this month, Newsweek ran a cover that pictured a big red balloon which read “The Recession is Over!” The cover and its related story caused a small uproar that resulted in criticism from President Obama. Although the cover story was meant primarily to sell magazines, the author did make a solid point: “… when economists proclaim a recession over, they’re celebrating a technicality: they mean economic output has stopped contracting.”[1] When the economy stops contracting, it does not simultaneously return to the rising rates we experienced in the years prior to this recession.

The reporting of numbers, percentages, graphs and ratios should only be taken for face value. We use them as indicators, as ways to gauge where we are and the possibilities of where we could be heading. Be aware that we are approaching a period that is sure to be overflowing with economists eager to be the first to accurately predict the recovery by accident. Statistics will punctuate every news story you ingest. A small increase over a quarter is no reason to speculate and sink loads of savings into any financial market. The recovery will come. As we work towards it, I encourage you to stick with the basics. Own stocks that make sense. Consider incorporating alternative investments such as real estate into your portfolio not only because of their soundness, but also because they work as a wonderful hedge against inflation. Pay off debt. Adapt to the times. And, most importantly, focus on those things in your life that you care about the most.

Tangled in the Reins of Negative Equity

Recent housing numbers indicate that first-time home buyers are being attracted to the market via low home prices and the $8,000 federal tax credit. But, the tax credit is scheduled to be pulled before the end of the year and declining home prices are leaving more and more home owners with the burden of negative equity.

This month, The Wall Street Journal reported that 16 million Americans owed more on their mortgages than their house was worth, up from 10 million this time last year.[2] Furthermore, Deutsche Bank estimated that 48 percent of U.S. homeowners will be “underwater” by the end of the first quarter of 2011, as unemployment rises and house prices remain low. A prediction similar to this appears frightening, but what place does negative equity have among the gory stories of today’s economy? I see three major implications.

For starters, if somewhere between 20 and 50 percent of all homeowners have negative equity over the next 2 years, then default rates will continue to plague the housing industry. True, not every residential mortgage with negative equity will default. But, having negative equity is frustrating for owners and the more underwater they become, the better chance they have of defaulting.

Next, this recession has placed a new taboo on debt, causing those that have lots of it to feel guiltier than during times of rampant overextended credit. Those with heavy debt burdens, such as negative equity in their largest assets, are less likely to spend. Our gross domestic product relies heavily on consumers to purchase. A sustained decline in consumption will further constrain our GDP growth and further ail our economy.

Lastly, a large population of home owners with negative equity translates to a large number of houses waiting to be sold. Because no one wants to take a large loss on their home, the majority of owners looking to sell are holding on to their homes. Do not get me wrong, this is not a bad thing if the owner is looking to hold on to the home as a long-term investment or to serve as a primary residence. However, a portion of the huge supply of homes waiting to be sold will be flushed into the market every time there is a bump in prices. Each time, this will dilute the market, bring down prices and elongate the downturn. Consequently, this ever-appearing inventory will also put a damper on the demand for new construction.

From state to state, local markets will continue to be choked by a high percentage of home owners with negative equity. Not surprisingly, the states with the greatest percentages of home owners with negative equity are primarily the states whose real estate markets were demolished by the housing burst. Nevada leads all states with 40 percent, Arizona follows close behind with 37 percent, California falls in third place with 30 percent and Colorado and Michigan round out the top five with 31 percent and 29 percent, respectively.[3]

Speaking Real Estate Today

As it becomes more popular for investors to include real estate as an active player in their portfolios, the asset class is being talked about differently. Left behind are the days of talking about real estate as an integral part of the next speculative boom. Banks are no longer willing to take the responsibility of the loan off the shoulders of the borrower by offering zero-down mortgages. Lending is tighter, though not unreasonable, and borrowers are more educated about the risks involved with taking on a mortgage.

The housing burst exposed the problems involved with treating real estate as a short-term investment. Unsurprisingly, investors today approach real estate differently. Dave Kansas of The Wall Street Journal recently wrote that investors are more cautious and “focused on real estate as something they can use: a solid place to live or play…”[4] Going along with Kansas’ article, investors cannot enjoy a family barbeque in the front yard of their stock portfolio or be awe struck by the view off the back porch of their bonds.

Many investors are irritated with the roller-coaster ride of the stock market. These investors are on the hunt for alternative assets to occupy a larger percentage of their portfolio; making it long-term and balanced, with little need for sporadic buying and selling. On the other hand, some investors feel the impulse to be over active and are reluctant to leave the stock market.

Including an alternative asset such as real estate into your portfolio allows your entire investment livelihood to not solely rely on the stock market. Alternative investments are typically not correlated with stocks, which means when the stock market is taking a dive, alternative investments are likely to be stable or even rising. Including an alternative investment such a real estate into your portfolio can also significantly lessen the impact of inflation, which is currently a concern of many investors. With the steep drop in home prices and mortgage rates hovering near record lows, a number of signs are suggesting that now is the right time to invest in real estate.

            In last week’s first Cash for Clunkers installment, Cash for Clunkers Part I: Good for Businesses?, I discussed the potential threat the program poses for small businesses. This week I am presenting Part II.

            Auto dealers across the country have been accepting qualified jalopies from consumers in exchange for up to $4,500 off of a new ride. Under the guidelines of the program, the federal government promised to repay auto dealers if they submitted the appropriate rebate forms. This week, the Department of Transportation (DOT) reported that 411,624 rebates have been submitted, totaling over $1.7 billion—more than half of the $3 billion that the government dedicated to the program.[1] Then yesterday U.S. Transportation Secretary Ray LaHood announced the program would be shut down Monday August 24^th because the $3 billion had dried up.

            The concern underlying the delayed payments is two-fold. For one, this is another commitment the government volunteered American tax dollars to without being adequately prepared to efficiently follow through. With every new government-sponsored program, we are losing loads of money to inefficiency. The second concern is that dealers typically purchase new cars from the manufacturers through finance programs. Often times, such financed deals cannot be paid off if the dealers are waiting on money from the government. Therefore, the dealers continue to pay substantial interest charges, which cut their profits on the vehicle sales. Interest fees could be difficult for many dealerships to swallow during what has so far been a dismal year for the auto industry.

            According to the National Highway Traffic Safety Administration (NHTSA), the federal agency in charge of overseeing Cash for Clunkers, it is racing to dedicate more staff to deal with the current massive backlog of rebate applications. The DOT reported that the NHTSA Cash for Clunkers staff “will hit 1,100 by the end of this week.”[2] In order to reach this high number of staff members, Citigroup and federal employees are being taken away from their current duties to help clean up the program.

            The ideas behind recent government-sponsored programs are rushed through Washington only to reach the general public with great inefficiencies. It is true, as Warren Buffet recently wrote in a New York Times opinion article, that “Our immediate problem is to get our country back on its feet and flourishing – ‘whatever it takes’ still makes sense.”[3] However, “whatever it takes” does not always need to translate into sacrificing preparation for the sake of immediate action. The amount of money the government wastes trying to clean up these programs after they are implemented could be dramatically slashed if officials took more time to think them through.

Short-Term Investments Clash with Long-Term Goals

            While investors who armed their portfolios for the long-term still experienced massive losses, they are better suited to ride out the turbulence than those who speculated for the short term. Stocks prices have jumped 40 percent higher than recession lows back in March, but investors should still be prepared for market pullback, which appears to be inevitable. With many experts predicting a bumpy recovery, long-term investments are getting more and more attention.

            Hoards of investors panicked and pulled their long-term capital from equities as the stock market deteriorated. Now, many of them are attempting to patch up their battered portfolios with stable, productive long-term investments. As investors’ emotions are calming and they are again taking action with their life goals in mind, the hunt for smart investments with long-term perspective is becoming more appealing. The media reports daily that we are amidst a buyers’ market, but the majority of the opportunities are suited for short-term investors looking to reclaim their loses overnight. After experiencing record losses, individuals are less cautious of risk. They are more willing to take on greater risk if it comes with the slight chance that they can quickly heal their deep financial wounds. However, wise investors are curbing the need to speculate in the short term and are once again assessing their long-term goals in order to help them guide their financial decisions.

            If your overall goal is to have the money you have earned make you enough money to live on after you retire, then you need to be looking beyond the stock market. A balanced portfolio with a dose of long-term investments, such as owning real estate, hedge funds, venture capital-related projects and REITs, is much more likely to help you achieve your life goals. Plus, short-term investments tend to carry headaches and heavy price tags, while longer-term investments tend to ride out turbulent markets and be priced more appropriately. Whatever the amount of financial losses you have recently experienced, remember to let your life goals play a part in your investment decisions.

Gradual Recovery, Not a Quickbound

            Many economists who hypothesized a steep, booming recovery have now changed their predictions. Historically, dramatic plummets have frequently resulted in steep recoveries. However, the current recession has the characteristics that are likely to breed either a slow, gradual rebound or a slight rebound followed by a new slump.

            The numbers for key indicators of economic growth this summer have been, at best, mixed. On the bright side, stock prices have climbed more than they have fallen, our gross domestic product is declining at a duller rate and job losses have slowed slightly. But, our unemployment rate still teeters around the highest levels reported since the early 1980s, consumer confidence fell in June and July, and homeowner vacancy remains well above the long-term average.

            Statistics aside, what we are likely to see is the emergence of a slight rebound, being fueled partially by consumer spending that cannot be sustained. Customers have been momentarily lured to the big-ticket-item marketplace because of juicy incentives such as the $4,500 Cash for Clunkers rebate and the $8,000 federal tax credit for first-time home buyers. Federal stimulus money will continue to help rejuvenate the economy for the remainder of the year, and likely on into 2010. But, when the money tanks get low, the recovery is going to once again become reliant on natural factors, such as consumer spending and successful businesses.  

            Consumers are likely to make large purchases less frequently because of new tendencies to save instead of charge. Households are saving much more than they have at any other point this decade. This is putting a muzzle on consumer spending, which accounts for around 70 percent of our GDP. Frugal customers are forcing businesses to reevaluate their business strategies. Furthermore, businesses are being required to implement money-producing techniques not reliant on excessive borrowing, which is and will continue to be rare. If consumers and businesses cannot sustain the momentum achieved by the stimulus money, then another slump will inevitably develop.

            The main initiative for the stimulus money is to breathe life back into significant economic driving forces like consumer spending or business investing. Currently, our major driving force, which is just barely keeping the economy idling, is the federal stimulus money. Throughout the end of 2009 and into 2010, we are all going to be responsible for building solid, long-term strategies that will be stable long after the federal stimulus tanks run dry. The government’s spending programs may have helped us avoid a financial apocalypse. But, without taking on the responsibility to continue moving our economy in a positive direction when the funds run out, we will soon find ourselves in another dire slump.

Once Bitten: Learning to Trust Real Estate Again

The housing bust burned real-estate investors. Even more frightening, many investors were blindsided by the bust because “credible” officials as high up as then -Federal Reserve Chairman Alan Greenspan were convincing them housing was immune to speculative bubbling. At some point, however, investors will be wise to forgive the real-estate market and reintroduce real-estate assets into their investment portfolio. Many signs are starting to strongly suggest that the time to do so may be right around the corner.

The housing bubble was the beginning of a lot of hardship, but it also sparked an onslaught of once-in-a-lifetime investment opportunities. Historically, real estate has acted as a hedge against the erratic actions of portfolios overloaded with stocks and bonds. But, which real-estate investment option has the best chance of performing well as our economy fights through a recovery? This question brings up a key point: Those who will capitalize on the upcoming real-estate investment opportunities will be those who are knowledgeable, current and responsive.

One market that is looking to explode with investment possibilities is that of commercial real estate. According to Foresight Analytics, a total of $1.4 trillion in commercial real-estate loans on U.S. properties will be coming due over the next five years. Therefore, troubled commercial real estate is and will continue to be actively searching for responsive investors. Those with the wherewithal to complete their due diligence and supply the capital are likely to be well compensated. However, getting involved in commercial real estate can be complicated.

The easiest way to break into the asset class is to do so through a real estate investment trust (REIT). According to a recent cover story in Forbes:

The highest-yielding stocks in the real estate universe are property-owning REITs, which are in business to collect rent and pass the money along to shareholders. … All REITs have the same basic objective: buy property and put it to ‘higher and better use.’[i]

Over the next five years an abundance of low-cost mortgages issued earlier in the decade will be expiring and owners of commercial properties will be actively searching for fresh capital. Anticipating a market soon to be filled with distressed commercial properties, many REITs across the country have started to raise new equity. In order to conserve money, many REITs have cut dividends, but investors wise enough to get involved are still currently soaking up average dividend yields of 7.3 percent.[ii]

With the previously mentioned $1.4 trillion in commercial real-estate loans coming due in the next five years, investors with available capital will be faced with enormous investment opportunities. The banks that created the loans do not appear to have the means to refinance them. This will leave the owners of the commercial loans anxious to attract new capital or sell at close-out prices. The REIT industry, which is currently active in purchasing and improving distressed commercial properties, offers educated investors a relatively easy way into the world of commercial real-estate investing. Plus, REITs usually own dozens of commercial properties, which often enables them to weather turbulent economic times. But remember, commercial real-estate investing can be complicated, no matter which flavor you choose. So always analyze your risk. Also, be weary of “experts” trying to convince you that any market is invincible or immune to any investing fundamental.

Not a Bank, an Ally

As far away from banks as Ally tries to position itself, the truth it, it is still a bank. Built up from the ashes of GMAC Bank, Ally is striving to push banking “in a new direction.” With transparency as its crutch, Ally is an online banking institution pleading for the public to see right through it.

In May, with General Motors seeking to file Chapter 11 bankruptcy, GMAC Financial Services hurriedly changed the name of its bank from GMAC Bank to Ally. Not wishing to be linked to the failing auto company, GMAC Financial Services underwent an intense marketing makeover to create a banking image that people could trust. Although potential customers may still be furious with the government bank bailout, Ally promises to take other frustrations out of banking.

One of Ally’s many advertising messages boasts, “No monthly fees. No minimums. No sneaky disclosures. No kidding.” Another asks, “What is your bank trying to sneak by you?” Ally’s mission statement claims it is a bank “that values integrity as much as deposits.” But, is this accountability too little, too late?

In an effort to prove to customers that it is not just a product of a high-priced marketing effort, Ally is heavily promoting a no-penalty certificate of deposit. The CD, which touts a two-percent, one-year annual percentage yield, is one of the most competitive currently in the market.

In times when the economy is bringing honesty to the surface of nearly every business, is it better to go with one that overtly claims to be straightforward or one that was all along? Obviously, the latter is much more difficult to find. Ally claims it is “always going to give it to you straight,” but will what they are giving amount to more than round-the-clock customer service, straightforward language and clever TV commercials?

A Spotlight the Size of California

Lately, the nation has looked to California to witness the opening of the worst wounds this recession has to offer. Being the epicenter of the housing collapse intensified California’s existing problems and brought its house of cards down to a heaping mess. The Golden State’s unemployment rate is more than two percentage points higher than the national average of 9.5 percent. The state government has issued IOUs in place of tax returns, student grants and payments to creditors. Governor Schwarzenegger is constantly involved in seemingly-endless negotiations with legislative leaders. Credit agencies have started to downgrade the rating on the state’s debt. The state’s student-teacher ratio is more than 30 percent above the national average and appears to be rising. And, grimmest of all, the state faces an estimated $26 billion-dollar budget gap for the current fiscal year.

The entire country was hit by the current recession, but California was mauled. While 48 states face budget deficits, none of them are as severe as California’s. The state was hit from nearly all directions, but, from my view, California appears to have two major hurdles to overcome.

First, the state is unfriendly to business. Last month, CNBC released results from a survey it conducted concerning the best states in which to operate a business. California ranked second to last in business friendliness, cost of business and cost of living. In this year’s survey, even Hawaii passed California in terms of business friendliness. In fact, the only state with harsher legal and regulatory framework was West Virginia, for the second year in a row. Overall, California ranked 32^nd. The state was pulled higher up because of its superiority in technology and innovation. Also, the state that makes up one-eighth of our economy did rank first in something else: access to capital, something that certainly cannot continue.[iii]

The second major obstacle I see is Californians expect a plethora of government-funded services but they are unwilling to sustain the tax threshold required to keep them running. This obstacle also faces our country as a whole. Our aging population requires an increase in Medicare and Social Security spending, yet no one wants to foot the bill. In May of this year, the California Legislature left tax increases in the hands of the voters and, not surprisingly, the voters rejected them. After all, the state’s income tax rates and motor vehicle registration fees are already among the highest in the country. With California already drowning deeply beneath its own problems, budget cuts were the only other viable possibility. The spending cuts approved this year “equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare.”[iv]

California’s appealing creative environment has caused inventive people to flock there for decades. But, with California’s system in shambles, residents may find it easier to relocate than to restructure. California’s ideal weather may not prove to be enough to attract the creative people needed to pull the state from its current slump.

Yeah, There’s a Czar for That

It is beginning to appear that the job of high-up elected officials is simply to hire others to oversee the issues we elected them to solve. President Obama has appointed a czar for nearly every significant issue that faces his administration. According to a recent article in the Chicago Tribune, “Republican Sen. John McCain has joked that President Barack Obama has ‘more czars than the Romanovs,’ the dynasty of czars that ruled Russia for three centuries.”

While the President is unquestionably overwhelmed with responsibility, the answer cannot always be to appoint a new position, which often means a new hefty salary. These new positions help keep one pair of eyes dedicated to an issue, which adds focus to important problems that need quick solutions. But, we elect individuals we feel can handle certain responsibilities and, in turn, we hold them accountable. Eventually the government will be overrun by managers instead of employees. Responsibilities will be thinly outlined, feet will be stepped on and too many cooks will be in the kitchen.

According to Reuters.com, the Obama administration has appointed:

a drug czar, a U.S. border czar, an urban czar, a regulatory czar, a stimulus accountability czar, an Iran czar, a Middle East czar, and a czar for both Afghanistan and Pakistan, which in Washington-speak has been lumped together into a policy area called Af-Pak. There are upward of 20 such top officials, all with lengthy official titles but known in the media as czars …

The rampant appointing of czars is no longer just a symptom of the federal government. State governments are also clearing out new offices for czars. For example, in Nevada, “Gov Jim Gibbons wants to use more than $500,000 in state contingency funds to hire a ‘stimulus czar’.” In California, Gov. Arnold Schwarzenegger appointed his deputy chief of staff as the stimulus czar. Federal stimulus law does not require governors to appoint czars, but the Obama administration has nudged them in the direction to do so.

In lean times, a growing government may not be the solution. Although czars do not always inherit a budget to aid them in their problem solving, they do obtain a plump salary. Possibly we, the people, should appoint a czar to oversee government expansion as it appears the person we elected to do so is struggling with this responsibility.

Our Trade Deficit Answer: More Giveth, Less Taketh Away

In 2006, the U.S. balance of trade, the value difference between the goods we import versus the goods we export, was an all-time-high $760 billion. In 2007 the gap narrowed to $701 billion and in 2008 it reduced to just under $696 billion. This year we are on pace to nearly slice last year’s trade deficit in half. But, it took a global recession like most have us have never seen to splash the water in our faces and open our eyes.

In the arena of international trade, the United States is the most significant country in the world. But, while we have led the world in imports, we have struggled to remain a large player in exports. During the 1950s and 1960s, the United States dominated in exports. In the 1970s, the United States transferred from having a trade surplus, which is a positive balance of trade, to a trade deficit. Countries such as Europe and Japan became fierce competitors in a number of industries and our balance of trade has suffered ever since.

To put our country’s balance of trade in perspective, imagine your personal spending habits. You produce an income and you spend. If you have zero savings and you spend more than you bring in, you are forced to borrow money. Your neighbor down the street, we will call him China, agrees to lend you money if you agree to pay interest. You feel comfortable with this cycle and each month you continue to borrow, which increases the amount you owe in interest. Your income stays consistent and soon your interest payments are equal to your income. Therefore, you can only afford to make payments on the interest each month. Something has to change, either you begin buying less or you start bringing in more.

Because our country buys more than we produce, we are forced to borrow money from other countries in order to finance our impulse to overindulge. Plus, since we have always made our interest payments, other countries are happy to lend to us. Essentially, we let other countries handle the responsibility of saving and we do the spending. The countries that save their money and lend it to us are enabling our spending addiction to continue. With access to easy credit, why save? Well, the global playing field is dramatically changing, which is exposing the importance of saving in order to be sustainable.

This recession has forced us to examine our spending habits. Credit has gotten tighter, which has our country’s importing trends reducing dramatically. Our ability to spend more than we make is weakening on both a personal and a national level. Therefore, the gap between the goods we import and the goods we export is narrowing. This gives us an opportunity to reset the way we approach spending. Because it is unlikely our country will resurface as one of the premier exporters in the world anytime soon, it is important to create a sustainable economy by lowering our trade deficit. But, can our country prosper without overindulging?

California’s Mortgage Protection Plan: Ingenious or Disastrous?

In an effort to boost home sales, the California Association of Realtors (CAR) has introduced a mortgage protection plan for first-time home buyers. The plan, officially known as the Housing Affordability Fund Mortgage Protection Plan, offers a monthly stipend to eligible first-time home buyers who lose their jobs due to a lay off. The funds are to be dedicated to the home owner’s mortgage payment and can be up to $1,500 per month for up to six months.

Because of rising unemployment numbers many would-be first-timers are turned off by the option of buying a house. CAR has introduced this new plan as a way to minimize the worries of first-time home buyers. Plus, because the CAR’s Housing Affordability Fund has received $1 million in funding, the cost to the buyer is nothing. As with all housing programs these days, applicants must successfully jump through a series of hoops and meet a number of requirements. According to Realtytimes.com, applicants:

\ May not have owned a home during the past three years

\ Escrow must have opened April 2, 2009, or later, and must close on or before Dec. 31, 2009

\ The property must be in California

\ The buyer must be a W-2 employee, not self-employed, and cannot be an employee of a business or corporation that he or she owns or controls.

\ The buyer must have been represented by an agent who is a member of the California Association of Realtors.

Surprisingly, there are no limits on either the cost of the property or the buyer’s income. Also, a $1 million budget can only be divided about 660 times. Therefore, if each qualified applicant uses the funds for the full 6 months, then only about 110 people can benefit from the program. I fear a program like this can easily spread itself too thin. If they qualify too many people and a wave of unemployment sweeps through the state, then the fund will run dry and the CAR will be looking to the state government to cover its obligations. And, as we have seen everyday in the news, California is nowhere near suited to take on another entity with budget problems.

Subprime Lenders, Transformed

With shady subprime-lending practices behind us, former subprime lenders have been forced to put their devious skills to work elsewhere. The complexities of loan modifications have attracted many ex-lending predators and provided them a vehicle to employ their corruption.

Now no one is saying that each and every person involved in loan modification is corrupt. In that same vein, no one is saying that each and every person who ever approved a subprime loan is guilty of being a swindler. A select few did truly believe they were helping their customers to fulfill the dream of home ownership. But, many of the lenders did thrive through corrupt practices in the subprime arena and have now adapted their skills and applied them to loan modifications. With many of the exotic mortgages they once approved sliding into foreclosure, the former subprime lenders are essentially scamming the same audience. Only now they are promising to modify the quirky loans.

Many businesses that formerly operated as mortgage brokers are now offering loan modifications to customers that are desperate to retain ownership of their homes. Dozens of such loan-modification companies have been accused by authorities of fraudulent business practices. The success rate for significant loan modification is low. Loan modifiers attract their customers by advertising that they can negotiate with lenders to lower payments on delinquent mortgages, which would in turn allow borrowers to stay in their homes. Of course, loan-modification businesses require upfront costs, sometimes exceeding $3,000. Customers, strapped for cash and desperate to hold onto their homes, are filing formal complaints against companies that take their money and make no progress with lowering their loan payments.

According to a recent New York Times article, “Since October, the California Department of Real Estate has ordered 210 businesses and individuals to stop offering loan modification or foreclosure prevention services, because they lacked a real estate license, as required by the state.”[i] In order to sidestep the rules in California, many loan-modification businesses have brought on a lawyer. This allows them to market their company as a law firm and, in turn, collect the upfront fees that keep them salivating. The lawyer will often act as a silent partner and have nothing to do with the process of modifying loans.

With the fees being paid upfront, the loan modifiers have no motivation to see that the paper work actually goes through to the lender for processing. Many loan-modification businesses have sprouted up hoping to make a quick buck, but few are genuinely concerned with helping clients lower their mortgage payments. So what measures are being taken to prevent loan-modification fraud? In California, the Federal Trade Commission has a lawsuit against a major loan-modification business and has prompted credit card companies to freeze the business’ accounts. In Florida, the country’s only privately-funded loan-modification investigative firm, MFI-Mod Squad, LLC, is committed to exposing illegally-operated loan-modification companies and the people behind them. To report loan-modification fraud or to learn more about the issue, visit http://www.mfi-modsquad.com.

Do These Pants Make Me Look Recession Proof?

Historically, a select number of industries have been considered so necessary that they have been labeled “recession-proof.” However, over the past 18 months the magnitude of this downturn has exposed nearly every industry, except for possibly the booming field of producing “foreclosure” and “for-sale” signs.

From gambling halls to hospitals, many facets of our economy have been referred to as recession-proof. They have been placed on special pedestals where recessionary floods cannot reach them to wipe them out. But, this current flood has raged long enough to erode those pedestals and expose the specialized industries to the same damage as the rest of the economy.

The health industry may be still growing, but it is at the pace of continental divide. According to some of the most recent research, a survey by the American Hospital Association, hospital employment grew by just 0.1 percent in January and February and was stagnant in March. Furthermore, nearly 50 percent of hospitals have cut staff in order to save money, and almost 60 percent reported a substantial decrease in their operating margins from last year.[ii]

The health industry is damaged and has handfuls of concerns, but not nearly as many as casinos, which have long been referred to as recession proof. With dented investment portfolios and non-existent job security, most people are not willing to let it all ride on red. According to an article posted by usnews.com:

Atlantic City casinos reported that revenues fell almost 20 percent this March from a year before, the largest year-on-year decline in the resort’s 31-year history. And on the Las Vegas strip, February revenues from table games plunged more than 35 percent from a year earlier.[iii]

Conventional wisdom has always suggested that the rich have a free pass to escape the pains of a recession. However, the rich have cut back on spending and the luxury market is dwindling. According to a June report from global business consulting firm Bain and Company, the luxury market is forecast to drop an unprecedented 10 percent and not fully recover until 2012.

This downturn has revealed a number of myths concerning even our strongest and most essential industries. Through layoffs, poor investment performance and frugal consumer spending, this recession has truly affected all sectors, even those once thought to be recession proof.

Recovery Doesn’t Go “Boom!”

Those opposed to the American Recovery and Reinvestment Act have persistently criticized the Obama administration’s heavy spending. Because the unemployment rate has continued to rise, critics are quick to argue that the entire stimulus package was a mistake. This week, Peter Orszag, President Obama’s top budget czar, traveled to New York to, once again, plead for patience.

Speaking to the council on foreign relations, Orszag reiterated that the Recovery Act is on the right track:

The economic situation we inherited was so severe that we needed to assure producers and consumers that aggregate demand would be boosted not just for a few months, but for a sustained period. That is why we envisioned a Recovery Act that would ramp up rapidly in 2009, have its peak impact in 2010, and lay the groundwork for further growth thereafter.[iv]

Patience is not something a lot of us have when we are in pain. However, the problems required to cause a recession of this duration took years to develop and it is going to take years to resolve them. We all forget that we are not going to wake up in the morning to find everything is back the way it was pre-recession. It is going to take time and effort to recover. The other side of this is not going to look like 2006. Some of the characteristics will be similar, but things are going to be different. We are all going to have to reset our mindset in order to move in a new, positive direction. We have tremendous opportunities to build a stronger, more efficient economy. None of us will ever forget these troubled times, but we can all learn from them and do our part to be better prepared for them in the future. This will not be the last time we experience a down economy, but with some preparation this will be the last time we experience one this painful.

President Obama rode his promise of change all the way into the presidency and that is exactly what we are going to experience over the next few quarters.

The New “R” Word: Reset

Over the past 18 months, we have been inundated with bleak tales of economic strife. Inevitably, the media has worn us all thin with their never-ending string of bad news. Yes, we are stuck in the thick of a very painful recession. Unemployment rates are flirting with double digits, fears of inflation are beginning to handcuff the government and their financial actions, political parties are torn and bulls are all but extinct on Wall Street. Instead of sitting on the sidelines and waiting for struggling newspapers to drop good news on our porch, I argue it is time for us to stop fearing our economy. I argue it is time for a reset.

After someone has a disease that is critical, but not terminal, they take a reset of their life and gauge what they have to work with. Although this would classify as more of an emotional reset, the same principle can be applied to our current financial struggles in terms of an economic reset. This is where we are right now, both here in the United States and in many parts of the world. Prices have reset. The sooner we realize this and the sooner we gauge what we have to move forward with, the faster we will regain the confidence our capital needs to move forward.

Our economy will recover, but it will not sporadically jump to pre-recessionary levels. Our core growth will be more conservative. Cheap credit will become a thing of the past. The availability of extreme financial leverage will be nonexistent. Instead of returning to business as usual, we will work to create a new world. One with regulations that help our economy, not inhibit it. We will all return to spending, but accountability will be involved. We will assess what tools we have and what tools we need. At that time, we will be able to help our economy grow responsibly. It is not something to fear, but something to embrace. And there is no time better than now to begin.

Much more on resetting our economy in future Powell Perspectives.

Start Your Own Business, Just Don’t Expect to Buy a House

Unable to find steady employment, many Americans are starting their own businesses out of necessity. Small businesses help create new jobs. Nationally, small businesses comprise half of all private-sector employment and they have created about 70 percent of new jobs each year over the last 10 years. Simply put, entrepreneurs drive our economy. But, when it comes to acquiring a home loan, self-employed business owners might as well be lepers.

The qualifications for obtaining a home loan through the Federal Housing Administration (FHA) require that self-employed borrowers have two years of self-employment experience in the same field. However, if a small-business owner has been self-employed for more than two years, then lenders need to see a consistent increase in the business owner’s earnings. If the borrower has been self-employed for less than two years, then past W-2 information is often considered irrelevant unless they still hold their W-2 job. And, since underwriters rely on tax returns as proof of a borrower’s income, year-to-date income is worthless until it is filed with the IRS. Many times, the self-employed borrower is out of luck, especially when banks are tight with lending.

Banks view the self employed as “risky” because their job security is wobbly and their incomes can vary widely from month to month. Because of this unfavorable view, self-employed persons are forced to explore other non-traditional options to purchase a home. The most-feasible of these options include owner financing and lease-to-own properties.

Looking for a faster sale or attempting to move a property that is otherwise difficult to sell, owners will sometimes offer financing themselves. Owner financing can help keep the banks out of the picture and get self-employed individuals on their way to home ownership more swiftly. While owner financing may offer easier qualification requirements and less paperwork, it is crucial to not get swept away in a sour deal. Having a real-estate attorney help to complete the transaction is crucial and will keep both parties informed about the details of the deal.

Another option for self-employed individuals is to find a lease-to-own property. With a lack of buyers, many condo complexes are offering lease-to-own options on their units. After the renter has agreed on a purchase price with the seller, the renter is allowed to move into the property and make monthly rent payments to the owner. This option allows the renter to build equity every time they pay their monthly rent. At the end of the lease, the renter can apply the funds that have accrued toward the purchase price of the property. Plus, by that time, the self-employed renter has had time to acquire the two years of tax returns needed to acquire a conventional loan.

Patience is often the best tool for someone who is self employed and looking to obtain a home loan. Although they may miss out on timely investment opportunities, a self-employed individual can use their waiting time to explore their home-buying options. This way, they will be well-versed in the home-buying process by the time they meet the requirements set forth by loan underwriters.

The way the system is set up, it makes more sense to be a W-2 employee for a number of years, then purchase a house and then risk it all to start your own business. But, entrepreneurs are a spontaneous and confident bunch. They do not always fit into the confines of structured systems. Therefore, we will continue to allow them to fuel the driving force behind our economy, we just will not help them purchase a place to live.

Mortgage Fraud Burns

Last week, the FBI released its 2008 Mortgage Fraud Report. The aim of the study was to provide insight into mortgage fraud crimes perpetrated during 2008. The Mortgage Fraud Report addressed “current mortgage fraud projections, issues, and the identification of mortgage fraud hot spots.”[i] Not to anyone’s surprise, the report suggested that mortgage fraud continued to be an elevating problem throughout 2008. Practically all of the findings indicated an increase in mortgage-fraud activities.

Although a single, precise instrument to determine mortgage fraud does not exist, there appears to be a positive correlation between mortgage-fraud activity and distressed real-estate markets. Therefore, mortgage fraud thrived in the stumbling housing market of 2008. According to the report, mortgage fraud is defined as “a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan.”[ii] Suspicious-activity reports (SARs), which are one of the government’s main weapons against financial crimes, increased 36 percent to 63,713 during the 2008 fiscal year, up from 46,717 in 2007.

Among the most popular mortgage-fraud scams are deceitful short sales, unnecessary bankruptcy filings, reverse-mortgage schemes and unlawful loan modifications. According to the FBI’s website, mortgage fraud is categorized under two main labels: fraud for profit and fraud for housing. Fraud for housing is typified by a borrower who provides false information in order to qualify for a loan. As long as borrowers are clear and honest throughout the loan acquisition process, they should have no worries of being a victim of fraud for housing. However, the FBI cautions borrowers of deceitful professionals who try to coerce them into reporting false information on their documentation. Even though you may be following the advice of a “professional,” you could still be held accountable for the crime.

The second category of mortgage fraud, fraud for profit, is committed by industry insiders who take advantage of borrowers for their own financial gain. Fraud-for-profit schemes include motives to revolve equity, falsely inflate property values or issue loans based on fictitious properties. Existing investigations suggest that “80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.”[iii]

In order to avoid becoming a victim of a fraud-for-profit scheme, the FBI offers the following tips:

* Choose your mortgage broker/banker carefully

* Arm yourself with basic mortgage knowledge

* If something is too good to be true, it probably is

* Never sign a blank document or a document containing blank lines

* Never sign over the house deed “temporarily” for a fee to anyone[iv]

A Slice of Real Estate Pie

            Investors know that building a solid portfolio involves striking a balance between producing high returns and protecting the portfolio’s assets. The underlying factor in both of these is risk. However, our desire to manage risk does not mean we need to sacrifice high returns, and that is the beauty and strategy behind having a well-diversified portfolio.

            The idea backing proper asset allocation is to have investments divided among different asset classes, such as cash, stocks, bonds and real estate. Returns from different asset classes do not regularly move up and down together, which is the reason diversification is so important and valuable. One asset class that has started to be widely considered as a necessary slice for a balanced investment portfolio is that of alternative investments.          

            Alternative investments include any investments that are not considered traditional or of the “main stream.” While traditional investments include stocks, bonds, treasuries and certificates of deposit (CDs); alternative investments include private equity, hedge funds, commodities and real estate. Alternative investments are typically most productive when they are treated as long-term investments. On their own, alternative investments can carry high risks, but as part of a diversified portfolio, they tend to reduce risk. This is because alternative investments often times have lower correlation with publicly traded securities, causing them to add much-needed balance when traditional markets are volatile.

            The size of the returns produced by a portfolio is obviously based on the types of assets included. But, the size of the returns is also largely impacted by how much capital is invested in each asset class. There is no fool-proof formula for how much money to invest in each asset class. Experts recommend that investors consider the time horizon of the investment and their tolerance for risk.

            A well-diversified portfolio can by no means guarantee a specific rate of return; that is impossible. Anyone that claims they can do this for you is lying, and I advise you to take your money and run. However, by managing a well-diversified portfolio with adequate amounts of traditional and alternative investments, you can significantly improve your chances for obtaining high returns. Long-term objectives, such as saving for retirement, can more easily be accomplished by putting your money to work in a balanced portfolio with a slot dedicated to alternative investments.

The Retirement Minefield

            The federal entitlement programs that help provide retirement security were among the many somewhat-stable programs to unravel throughout the course of this recession. Projections released May 11th by the trustees of the Social Security and Medicare trust funds indicate that both funds will run dry sooner than estimated in last year’s report.

            The Social Security trust fund’s revenues still exceed benefits by an ample amount, making it the better off of the two funds. Unfortunately, the onslaught of baby boomer retirees will certainly change that. The new report predicts the supply will continue until 2015 but quickly move into deficit thereafter. Medicare is in critical condition compared to the Social Security trust fund. The Medicare Hospital Insurance fund is already running a deficit, and the trust fund is set to run dry in 2017. However, these Medicare estimates are harder to predict because they depend on forecasts of health-care costs.

            Shrinking federal-entitlement programs coupled with a growing elderly population result in a problem that demands our attention. Plus, throw in the skyrocketing number of bankruptcy claims among the elderly and you have a complete recipe for disaster. According to the Associated Press:

The world’s 65-and-older population will triple by mid-century to make up one in six people. Census estimates released (last) Tuesday show the number of senior citizens has already increased 23 percent since 2000 to 516 million, more than double the growth rate for the general population. The fastest-growing age group, seniors now comprise just under eight percent of the world’s 6.8 billion people. By 2050, the senior group will increase to 1.53 billion.[1]

Furthermore, elderly Americans have been seeking bankruptcy-court protection at drastically faster rates than any other age group. According to the AARP, the rate of personal bankruptcy filings among those ages 65 or older jumped by 150 percent from 1991 to 2007.[2] Rising debt and health-care costs are the two main factors contributing to the spike in claims.

            With all the obstacles to negotiate within the world of obtaining a comfortable retirement, now is the time to prepare for the worst. One of the most beneficial investment vehicles for retirement planning is the Roth IRA, in which nearly all income growth and withdrawals are tax-free. Plus, new tax rules are making it easier to convert traditional IRAs and employer-sponsored retirement plans into Roth IRAs. The majority of employers are no longer offering retirement plans that are sufficient for their employees. Plus, with major government programs becoming depleted at rapid rates, it is time to become proactive in your retirement planning. Putting your money to work now will help to create substantial income flow that will allow you to enjoy your retirement. It is up to you to create an opulent nest egg in spite of all the crumbling entitlement programs that are looking to crack it.

The Skinny Behind Short Sales

            While we have all become keenly familiar with foreclosures and their impact on the real estate market, their nearly-as-popular cousin, the short sale, is somewhat less understood. With an unprecedented number of property owners upside down with their mortgages, the Obama administration has implemented incentives in its housing-rescue plan to persuade lenders and sellers to choose short sales over foreclosures. 

            On the surface, short sales are easy to comprehend. Simply put, a short sale is when a lender agrees to accept a mortgage payoff that is less than the full amount from a borrower. When an owner of a property is financially distressed, the option of foreclosing becomes more and more realistic. But, the process of foreclosing is a lengthy and costly one. Although short sales can also be very time consuming, they are often times preferred by lenders, investors, buyers and sellers for a number of reasons.

            According to the National Association of Realtors, short sales have accounted for 15 to 20 percent of sales of existing homes in 2009.[3] Sellers prefer short sales because a short sale is likely to not damage their credit as badly as a foreclosure. Buyers are attracted to short sales because they have the opportunity to purchase property for less than its current market value. If any investments are backed by the property, investors prefer short sales because they will lose less than they would in the event of a foreclosure. A short sale is a better option for banks and lenders because, typically, short sales result in about a 20 percent loan loss, whereas homes sold after foreclosures result in about a 40 percent loan loss.[4]

            Although short sales are appealing to buyers and can prove to be an incredible investment opportunity, these are not do-it-yourself projects. In a short sale you will need help from an experienced real-estate agent or attorney. Not all agents know their way around a short sale, so make sure you consult with one who has a good track record with short sales. As a seller in a short sale, the difference between the actual loan amount and the acquired amount is sometimes considered income for which the selling homeowner can be taxed. Therefore, it is important to include a tax professional in the deal.

            The Obama administration’s short sale incentives allow homeowners who agree to short sale the opportunity to receive up to $1,500 in closing costs. In May, “the government also announced it would make it simpler for borrowers to voluntarily transfer ownership of properties to mortgage companies through a “deed in lieu” of foreclosure.”[5] Lenders can also receive $1,000 for accepting a deed-in-lieu transaction, making them even more responsive to sellers wishing to avoid going into foreclosure.

            Often times, short sales can be a better option than foreclosures, but there are still many risks and stipulations that come to the buyers, sellers and lenders involved. Understanding short sales and the incentives that come with them can help sellers get out of a financial rut by avoiding foreclosure. For buyers, hunting for short sales can be time consuming, but the investment potential can prove to be worth the extra effort. For all of the investors that are sitting on the fence and looking to put their money back to work, short sales should be a considerable option.