Robot Insurance and Reverse Mortgages

I had to resurrect this old Saturday Night Live skit to highlight the never-ending scare tactics used to frighten senior citizens and in the process separate them from their money…

CLICK HERE

From the April edition of our Personal CFO newsletter…

 

REVERSAL OF FORTUNE

 

APRIL 2008

 

 

Another day… another attempt at separating senior citizens from their money. 

 

The air waves are being blanketed with advertisements for reverse mortgages.  They are being sold as a cure-all for retirement financing, easy living, and in some cases a fantastic and astute means to finance other investments. The reality is that this could not be farther from the truth.  Reverse mortgages can be to the advantage of senior homeowners who wish to remain in their residence, but are having difficulty keeping up with the mortgage payments, or have no other means of funding for unexpected expenses.  Reverse mortgages are a vehicle whose use should be rare at best.  Unfortunately they are being marketed like common aspirin, a cure all. 

 

There are three options for older homeowners who wish to tap into the equity of their home. 

 

1. Sell, and downsize
2. Take out a home equity loan.
3. Get a reverse mortgage.

 

A reverse mortgage is an interest-bearing loan secured by the equity in your home.  To be eligible, the borrowers must own the home and be 62 years or older, however certain lenders are now offering them to people as young as 60.  Similar to a home equity loan, the reverse mortgage allows one to convert their home equity to cash to use for whatever purpose the borrower wishes.  Reverse mortgages, unlike other home loans do not require the borrower to make ANY INTEREST OR PRINCIPAL PAYMENTS THROUGHOUT THE LIFE OF THE LOAN.  From that fact alone one can understand why unscrupulous financial advisors are salivating.  The interest is added to the principal which is called rising debt.  Unless the borrower opts for a fixed term the loan becomes due when the borrower dies, sells the home, or is out of the home for at least 12 months (nursing home or assisted living facility).  When any of those events come to pass, you or your heirs must repay the loan, including all compounded interest in full.  Usually what occurs is the house is sold, and the proceeds are used to repay the loan. 

 

Like traditional mortgages and home loans interest will be charged. However, in the case of reverse mortgages, the interest is much higher.  In addition, the fees and costs associated with reverse mortgages are often higher as well, sometimes as high as 8% of the total loan amount (think commission).  Another point that is often missing from the Robert Wagner sales pitch is the fact that you are still the owner of the home and therefore are responsible for the property taxes, insurance and maintenance.  If you are unable to meet these obligations, the lender will have the right to foreclose, leaving you with no place to live and no home equity to draw upon.  If there is ever a point in time that you wish to downsize or move to assisted living facility for reasons other than costs, your loan will become due.  With all the compounding interest, you might be quite surprised with how much money you owe, which can restrict options.

 

Deciding whether or not to tap into ones home equity through a reverse mortgage for retirement needs should be viewed as a last resort.  Factors that determine whether or not one should check into the Last Chance Saloon depends on: your health, your spouse’s health, your various income sources, the reasoning behind the loan, timing, estate and legacy planning and use of the loan’s proceeds.  The unfortunate reality is that reverse mortgages are being marketed and sold incorrectly with the usual pie-in-the-sky, Lifestyles of the Rich and Famous mentality.  You DO NOT take out a reverse mortgage to fund vacations, boats, second homes, club memberships and other investments. Call it the double whammy; an unscrupulous financial advisor gets a hefty commission when selling a reverse mortgage and gets another fat check when convincing the senior to use the proceeds to fund another can’t miss investment.

 

The original intent regarding the utilization of reverse mortgages was for aging, low-income homeowners to be able to keep their homes by providing a source of additional income to meet expenses.  Crooked advisors are coming to the realization that retiring baby-boomers are sitting on immense pools of home equity capital that they are more than willing to drill for.  Reverse mortgages are being marketed as way to enhance unaffordable and unrealistic retirement lifestyles.  Home equity is an important building block of ones financial plan.  Reverse mortgages can be a fantastic tool for helping seniors faced with losing their homes.  For everybody else, it is the fast track to depleting the blood, sweat and tears you put into building home equity.

 

Tips When Considering Reverse Mortgages:

• Weigh All Your Options: Whether you need money to pay bills, or just want some extra cash, a reverse mortgage should ideally be a last, not a first, resort. Does it make more sense to sell your house and either downsize or rent while carefully investing the sale proceeds? Take out a home equity loan or line of credit? Can you consolidate credit card debts? Even if you are having trouble paying for your taxes or for home maintenance, there may be local government assistance programs that can help. Whatever your situation, ask your state agency on aging about less risky, or lower cost, ways to address your needs.
• Understand the Risks, Costs and Fees: Just because you won’t be making any interest payments as long as you live in your home doesn’t mean the interest rate doesn’t matter. If you do decide to move, for whatever reason, you will have to pay back the loan plus compounded interest. The same is true if you have to leave your home, for whatever reason, for more than 12 months. Be sure to ask about all costs and fees, including any prepayment penalties.
• Recognize the Full Impact of Your Decision: While you typically do not have to pay taxes on the proceeds of a reverse mortgage, the income or lump sum you receive could impact your eligibility or your spouse’s eligibility for various state and federal benefits, including Medicaid. In addition, depending on the laws of your state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if you have a health emergency and need to enter a nursing home and your spouse must liquidate assets to pay for that care. Finally, a reverse mortgage is generally not the right choice for those who want to leave their homes to their heirs.
• Get Independent Advice: Reverse mortgages are such complicated transactions that the federal government requires borrowers to meet with HUD-approved counselors before obtaining a federally guaranteed loan. (Most loans are federally guaranteed, but increasingly lenders are offering proprietary loans that are not.) Make sure that any counselor recommended by your lender is truly independent by asking whether he or she receives any funding from the lender or the mortgage industry. Even if you are applying for a loan that is not federally guaranteed, it is a good idea to get advice from a trusted financial adviser who has no interest in either the mortgage or any investment you plan to make with the proceeds. In any event, before you agree to a reverse mortgage, be sure to consult with legal and tax professionals who know the consequences of reverse mortgages for residents of your state and who are not connected in any other way to the transaction or the lender.
• Be Skeptical of Reverse Mortgages as Part of an Investment Strategy: If someone urges you to obtain a reverse mortgage to make an investment or purchase an insurance product or a security, such as a deferred annuity, be very skeptical, particularly if they are promising high returns. In essence, they are encouraging you to speculate with your home equity, which you may need for more critical purposes down the road. Also consider what will happen if the returns turn out to be less than promised, or worse, you lose the principal. If you cannot sustain that kind of low return or loss, you should probably not be making the investment with your home equity. 
• Ask the Right Questions About the Proposed Investment Strategy: Reverse mortgages are an extremely costly way to fund an investment. Before you obtain a reverse mortgage for investment purposes, make sure you understand both the terms of the loan AND the terms of the investment. What fees must you pay, directly or indirectly, for the reverse mortgage? What are the costs and fees associated with buying the investment? With selling it? How easy will it be to get your money out if you need it suddenly? Does the investment have a long surrender or lock-up period? What is the potential downside? Is it marketed and sold by the same person or entity that is offering the reverse mortgage? How is the reverse mortgage broker compensated? How is the seller of the investment compensated?

 

Source Material:

FINRA Investor Alert Reverse Mortgages: Avoiding a Reversal of Fortune March 13, 2008

 

Another BIG BANK Sticking it to the Elderly

 

From the Wall Street Journal…

Wachovia to Pay $144 Million To Settle OCC Investigation

By DAMIAN PALETTA and DAVID ENRICH
April 25, 2008 10:53 a.m.

WASHINGTON — Wachovia Corp. agreed to pay up to $143.9 million to settle a government investigation into its relationship with telemarketers that allegedly harmed thousands of customers, including the elderly, the Office of the Comptroller of the Currency announced Friday.

Part of the settlement includes an agreement to pay up to $125 million in restitution payments to consumers harmed by the practices.

The agency, which is a division of the Treasury Department, estimated that “thousands of consumers, many of whom were elderly” were harmed by schemes involving remotely created checks, which are checks that do not have an accountholder’s signature. The OCC said the “bank profited from these activities in the form of fees collected from and balances maintained at the bank by the payment processors and telemarketers.”

The agreement requires Wachovia to pay a $10 million fine and contribute $8.9 million to consumer education programs focused on the elderly.

“This situation was unacceptable and we regret it happened,” a Wachovia spokeswoman said. “We will work diligently to provide restitution to consumers affected by the situation and to educate consumers.  Wachovia is pleased to have resolved this matter with the OCC.”

The spokeswoman said the bank had already accounted for the penalties and that it would not have “a material adverse affect on our financial condition.”

The OCC said the settlement culminates an 18-month investigation. The regulator is also requiring Wachovia to create new policies and procedures with respect to remotely created checks and telemarketers, among other things. Wachovia said it has already made changes to its policies. For example, the bank’s new policy is not to do business with companies that are strictly telemarketers.

Charlotte-based Wachovia is one of the country’s largest banks, with more than $800 billion of assets. Like many of its peers, the bank has come under pressure during the global credit market turmoil and earlier this month cut dividends and raised $8.05 billion.

 

 

 

Meet the new boss…Same as the old boss!

Why people allow internally, by nature, conflicted companies to manage their money is beyond me!

 

Dem/Dumb Debate

First off I would like to applaud Charles Gibson for asking questions of real substance.

Second, Obama is a liberal 1-900 number.  A liberal-talk-hotline that says all the necessary phrases and buzz-words that gets left leaning individuals hot.  There is no substance whatsoever.  I could not believe his inept handling of questions regarding taxes, social security and anything short of Econ 101.  I could handle questions regarding quantum physics with greater ease than the glassed-eyed babble that Obama spewed out about capital gains taxes.

A vote for this man involves the complete suspension of belief in gravity.  Seriously are you Obama supporters on some sort of drug?  Do you HONESTLY believe that this guy is competent to be POTUS?

Hillary Clinton did a horrible job answering the Bosnia flap.  She should have just said I screwed up…period.  Instead she rambled on and on.  She is the antithesis of her husband, not likable at all.

With all the brilliant left-of-center individuals here in the United States, for example: Steve Jobs, Robert Johnson, Warren Buffet, and Joe Lieberman; this is the best the Democratic Party can come up with?

It scares me that either of these candidates are close to becoming POTUS.   

I AM BACK

For the past four months I have been volunteering my time as the Head Coach of the Lakewood Ranch Lacrosse team. 

It takes up about 18 hours a week; couple that with all the appearances, my daily show on WTMY AM in Sarasota, the national show, my clients, emails, wife and kids it is safe to say that the blogging has suffered. 

We just completed our season and I AM BACK!

Rest in Peace

Idealism is fine, but as it approaches reality, the costs become prohibitive.— William F. Buckley, Jr.

William F. Buckley Jr. with his oratorical ability and incredible intellect has no equal.  He and National Review Magazine have challenged, educated and inspired me greater than any profesor I ever had. (For quite a bit less money, I might add.)

Watching him verbally thrash left wing loons all the while keeping his blood pressure and tone at normal Sunday afternoon levels is something that I will always aspire to do.

Great Election Stuff from SNL

Two great clips from this past weekends show.  They need no editorial content.

Clip One

Clip Two

Obama…Bull Excrement We Can Believe In

The Obama Economic Manifesto reminds me of the Simpsons episode where Homer decides to run for the head of Springfield’s garbage department. 

Homer embarks on a populist campaign where he promises the sun, the moon and the stars to all of Springfield’s residents…from Wikipedia.

A local department store, Costington’s, announces the formation of a new summer holiday intended to boost sales: Love Day. The Simpsons celebrate it, but the vast amount of packaging it produces causes the garbage to build up. When Homer eventually takes it out he is infuriated with the garbage men as they drive away without collecting the Simpson family’s trash. He insults the men, and in response, the family’s garbage service is cut off, leading to the Simpsons’ garbage piling up on their front lawn. As the mess continues to grow, Marge tells Homer to apologize for the remark, but he insists on doing things his way.

Homer awakes one morning to find that the pile of trash at the front of the house has been removed and learns that Marge had written a letter of apology to the Springfield Sanitation Commissioner, forging Homer’s name. In response, Homer goes to see the Sanitation Commissioner, Ray Patterson, demanding the apology to be returned. Patterson tries to be nice to Homer, but Homer insists on fighting, Eventually Homer decides that he will run for Sanitation Commissioner.

Homer begins to promote his campaign. It starts off badly with Homer being beaten up after interrupting a U2 concert, but picks up when Homer, after prompting from Moe, thinks of a slogan for his campaign: “Can’t someone else do it?” Homer spreads his message to the town, which works, leading to his landslide victory in the election. After being sworn in to the office, he shows what he plans to do by singing a parody of “The Candy Man” entitled “The Garbageman Can”.

However, fulfilling his promises proves quite costly and after Homer’s mass spending spree, Mayor Quimbydenounces him for spending the Sanitation Department’s yearly budget in only a month. To solve the money problem Homer gets garbage companies from across America to put their excess rubbish in Springfield’s abandoned mine shaft. The rest of the family warn Homer that this is endangering the town, but he refuses to listen. Eventually the garbage builds up underground and begins to erupt, pouring trash all over the town. At a town hall meeting Homer is booted out of his post and replaced with Ray Patterson, but Patterson declines reinstatement to the position, expressing his amusement at them “wallowing in the mess [they] made.” Quimby then takes extreme measures by moving the entire town five miles down the road from its current site.

^{Garbage Man Can Lyrics…}

I’m really proud of you
Homie but can the garbage man really do all those things you said?
Oh the Garbage man can Marge the Garbage Man can.
::fingers snap::
::melodic note::
::fingers snap again::
Who can take your trash out?
Stomp it down for you?
Shake the plastic bag and do the twisty thingy too?
THE GARBAGE MAN!!
Oh the Garbage Man can
The Garbage Man can and he does it with a smile and never judges you.
Who can take this diaper?
I don’t mind at all
Who can clean me up before the big policeman’s ball?
THE GARBAGE MAN
yes the garbage man can
The sanitation folks are jolly friendly blokes courteous
and easy going they mop up when your over flowing and tell you when
your arse is showing
Who can…..
Who can…..
Who can…..
Who can…..
THE GARBAGE MAN CAN!!
‘Cause he’s Homer Simpson Man
HE CLEANS THE WORRRRLD FOOOORRR YOOOUUU

Anyway…

According to one of Obama’s campaign big shots Quentin Hardy, Obama’s Manifesto is nothing more than campaign rhetoric. 

Last Thursday Quentin Hardy who also is the Silicon Valley Bureau Chief for Forbes Magazine appeared on CNBC’s Kudlow and Company along with Ken Heebner and Ben Stein.  Ben Stein proceeded to rip Obama’s dangerous and ridiculous economic plan with vigor.  When host Larry Kudlow asked for Hardy’s response, my mouth almost dropped to the floor.

Hardy was pressed on the fact that he is a free market capitalist, how could he go along with this plan.  His ambivalent response was shocking.  He basically stated (paraphrasing) that it was all rhetoric, just campaign talk.

Basically he was saying that Obama’s plan was nothing but vapid rhetoric to get votes.  I didn’t know whether to laugh or cry.  I know that his manifesto is blatantly ridiculous, but it did make me feel a little more comfortable that a front-runner Presidential candidate does not beleive his own BULL EXCREMENT. 

I have tried to get a video copy of this exchange or a transcript and have come up empty everywhere.  I actually contacted CNBC and they have yet to a respond.  I find this a bit curious . 

YES WE CAN!!!!

We can divide the country into little groups.

We can make more people dependent on the government.

We can say or do anything and make ridiculous promises to get into power.

YES WE CAN!!!!

 

A government strong enough to give you everything, is strong enough to take everything away.

Thomas Jefferson 

OBAMA FINANCIAL PLAN RELEASED…SHOULD BE CALLED RED DAWN II

Scary stuff from the Obama camp. 

READ HERE

Obama is bringing change alright…Go to Communism, Directly to Communism, pass by Socialism if you make under 75K collect $200.

If this guy gets elected with this vapid economic plan we are in deep trouble.  The ideas put forward, though sounding peachy to the economic ignoramous masses is the equivalent of throwing gasoline on a fire.

Need comments on this guys…Please read his Manifesto as soon as possible.

Major World-Wide Sell-Off

Stock markets around the globe sold off today and the current futures for the United States markets are pointing to a replay here tomorrow.  Perception has become reality for the world markets.  Investors can expect tremendous volatility over the next several months.  If your portfolio is positioned in quality value dividend paying securities weathering this current storm will not be a problem and could turn in to an enormous opportunity.  If your investments have a short term time frame, being 18 months or less we strongly suggest being in cash.  (That should always be the case irregardless of market conditions.)  An interesting fact is that once the “recession” is finally declared markets should start recouping losses. 

From the Washington Post… 

Conventional wisdom is that stock prices drop as well. Stocks usually drop before a recession, something that may be happening now. However, the market tends to look ahead and starts to respond favorably to the expected end of a recession long before it occurs. Influential economist Donald Luskin of Trend Macrolytics recently ran the numbers and found that stocks have produced an average return of 12.1 percent in post-World War II recessions. This is only slightly below the average return outside recessions.

If you have any other questions or concerns please feel free to contact us as soon as possible.

Some articles of note…

Don’t Feed the Bears

Navigating Financial Storms and Corrections

Financial Planning Reality

Where Your Tax Dollars Go

Check out this fantastic website that tracks the mighty Blob we call the federal government.

Click Here

Also check out one of my old pieces on the ever expanding size of the government.

Click Here