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Today's Commentary: 03.10.06
The Commodity Conundrum
Vince the alarmist has been buying gold for a little more than four years. Generally mistrustful of the Fed and their intentions, their, as he puts it, silly fascination with inflation, and the counterintuitive control of money supply, he has been spotted buying American Eagle one-ounce coins from visibly armed Asian merchants who deal with precious metals at a local coin shop. And if you hadn't noticed, gold has become an increasingly precious metal over that time period.
Normally, gold is a hedge type investment, the kind someone as skittish as Vince is likely to buy when his view of the world sees only a place that is on the brink of a major calamity. His 'Chicken Little' approach to investing mind you, he hasn't sold a single coin during that time, may have some merit. But I am unsure he really grasps the reason why prices have risen the way they have. Sure there is the rising demand for the commodity by heavy weights like China. But that is only part of the explanation.
When Exchange Traded Funds made their debut not too long ago, the belief that these funds traded like stocks would provide a passing interest to those that have sector fever on their minds. It turns out, that folks who like the idea of investing in commodities have found this an easy way to buy into an otherwise complicated market.
But few expected that they would have been impacting the overall price of gold. The ETF streetTracks Gold Shares, listed under the ticker GLD has been keeping the price high to keep their investors liquid a recent article in Barron's revealed. Currently, the fund owns almost two months worth of the entire year's gold production. And they are not seeing any reason to stop their frenetic buying.
But gold is not a stand-alone commodity and as it becomes more expensive, investors begin to look for other possible opportunities. Silver is up almost three fold, oil continues to sustain its highs, and a whole host of other commodities are being priced well above their perceived value.
While the Fed is fighting inflation and giving the overvalued equities markets the opportunity to price in further rate hikes, commodities are taking the high road price-wise. What is missing are the "Vinces" of the world, the worriers who no longer think there is anywhere safe to put their money. Many are unaware of the risk involved and those who have the basic recall of three decades ago when we sat in line at the pumps and waited to gas up so we could buy overpriced groceries, have been suffering from memory loss.
While inflation may still be hidden at the grocery store, lost inside ever decreasing package sizes, the investors who are buying these commodities, so far just a handful, are the blame. Manufacturers, dependent on a variety of commodities including agricultural products are feeling the pricing pressure and passing these costs on to the consumer. Trim an ounce off a box of cereal sold by the millions and you have essentially raised the price of that product without ever having actually raised the price.
While Vince grapples with his ghosts, it might be wise to begin to pay attention to how the world is stocking up on precious wares. In limited supply situations, he who owns the most, owns the markets. This is no time to be a debtor nation.
Today's Commentary: 03.08.06
Fast Forward: Mortgages in Reverse
As Americans face the growing problem of entitlement reductions, poor or diluted pension payouts, corporate bankruptcies, or just insufficient funds to meet day-to-day expenses, reverse mortgages will become the new nest egg for a good deal of the currently retired, or those who are planning to in the near future. Are they right for you or your elderly parents?
Using a reverse mortgage will become an important consideration especially for those of us who have elderly parents that continue to live in their own homes. Their independence will come into direct conflict with inheritances as more folks consider the option. Reverse mortgages, however do not harm the value of the home.
They do impact the inheritance though. The same warning applies whenever money is involved: beware the pitfalls of such an action.
We are all aware of the way a traditional mortgage works the kind that was the mainstay of the lending industry before loans with adjustable rates, interest only mortgages, and any other number of creative financing options came on the scene in the last five years. In a traditional forward loan, the borrowers income and debt ratio play an important part in the qualifying process. Because reverse mortgages are designed for folks who are 62 and older, the requirement of income is not a consideration.
Reverse mortgages are ideally designed for the following people:
Older than 62 years of age
Own their own home or have a mortgage that is very low
Have found that their current level of income is insufficient to meet with daily living expenses
A clear understanding of the risks, the costs, and the consequences.
Reverse mortgages have grown in popularity for several reasons. In many areas, home price have hit all time highs making some seniors real estate rich and cash poor. Quickly following those high home prices are substantial increases in taxes, insurance, and upkeep. Far too many seniors failed to anticipate the rise in their homes value and did not calculate these additional costs into their retirement plans.
Seniors are also faced with extended life expectancies or worse, the high cost of long term care for one or both owners. In some of these situations, at-home care is still a viable option but is often unaffordable on the fixed income of many retirees.
The National Council on Aging has seen this trend as a positive development for the government. If seniors are allowed to take equity from their homes, this could keep a larger amount of people from looking to the federal government for assistance. It has been suggested that the savings reverse mortgages could provide agencies such as Medicaid would reach $5 billion over the next 5 years.
Not only has poor retirement planning affected those that are already retired, the current batch of workers looks to be woefully short of their retirement goals as well. A recent survey of older workers found that of those that did save something, they had not put away nearly enough into their plans to last. Of the 95% aged 55-64, or those right on the cusp of calling it quits had an average of $78,000 in real savings.
Here are the pitfalls of using your home or having your parents use theirs to offset financial problems:
1. Changing your mind. If you decide to move or sell your home or happen to die shortly after the reverse mortgages has been approved, the costs of generating the loan could be extremely high. Because these mortgages have higher than normal fees, and because the way the loan is written, the interest is due at the end of the deal, the longer you live, the cheaper the mortgage gets. Ideally, the best scenario is outliving the bankšs loan.
The reason for this is the way the loan is calculated. Traditional or forward mortgages us an APR (annual percentage rate) to calculate the value of the loan. This is based on the lender's assumption that you are responsible for the total loan on the first day.
Reverse mortgages use TALC or Total Annual Loan Cost (TALC). According to reverse.org the TALC is a disclosure that "shows you what the single all-inclusive interest rate would be if the lender could only charge interest and not charge any other fees. Specifically, it tells you the annual average rate that would produce the total amount owed at various future points if only that rate were charged on all the cash advances you get that are not used to pay loan costs. In other words, it shows you what you are paying in total for the money you get to spend."
2. Age. The age of the borrower plays a significant role in the total cost of the loan. Generally speaking, the older you are, the more money you are likely to receive from this type of loan. You must also be able to live in the home as a primary residence.
3. Lack of Financial Savvy. Once folks feel backed into a financial corner, they often make mistakes that they can come to regret. The need for steady dependable stream of income might have many seniors looking at annuities. If an insurance salesperson suggest that a reverse mortgage might be the best way to purchase one of these insurance products, report them to Federal Trade Commission (FTC). You can do that online at ftc.gov or by phone, toll-free, at 1-877-FTC-HELP (1-877-382-4357).
4. Non-Recourse . You need to understand that when a reverse mortgage takes effect, the equity of the home is being siphoned off little by little. This will have an effect the inheritable value of the property. Careful consideration should be taken if the homeowners were making plans to pass the house down to heirs. It is largely assumed by the lender that value of the house will remain the same or increase over the course of the agreement. Non-recourse protects the lender from assuming a property that is worth less than the loan.
5. Continued obligations. Reverse mortgages do not transfer title. Because the homeowner retains this important document, they are responsible for taxes (which will rise in tandem with the home's value), insurance (which will creep higher as the home ages and local fire codes change) and most importantly, upkeep (construction costs for roofs, plumbing, and general exterior maintenance also rise over time).
The value of the home is incredibly important and for this reason, reverse mortgages might be a good idea to help keep the house marketable. Using the reverse mortgage to keep major repair expenses from impacting the homeowneršs fixed income might be the single best reason for these types of loans.
It is difficult, without help and side by side comparisons of your options to determine whether you are getting the best deal. Reverse mortgages however are not the only option for homeowners who are faced with fixed incomes and rising bills.
Websites such as ElderCare can help or you can call toll-free, 1-800-677-1116. Ask for your Area's Association for the Aging or AAA. These folks can provide information about the availability of loan programs for home repairs or improvements, property tax deferral or property tax postponement programs. The cost of many of these programs will fall to your heirs, but they won't be obligated to pay until the house is sold. They will however appear as a lien until they do.
These low cost options allow seniors to remain in their home and keep it in good repair. Both of these are important considerations in any decision.
Things you can do to prepare for this sort of problem facing you in your retirement years read like a good sense checklist:
Get a handle on your debt - Doing this now might offset the need for a reverse mortgage. If you do not do this before you need one, all of your debts will be rolled into the loan at a very high cost. Reverse mortgages generally cost twice as much as traditional forward mortgages.
Change your bad habits now - Part of the problem with the generation approaching retirement is their "spend it as you earn it" mentality. Current figures reveal that we saved 23% less in just the last four years while our homešs average price increased by almost the same amount. These are troubling numbers. There have been few times in history when those kinds of gains in housing wealth have continued for more than a decade. Unless you reverse those savings habits, the imagined wealth in your home may be significantly less than you might have anticipated.
Beef up your savings - It may be time to face the grim reality that you havenšt socked away enough to retire. You can do either one of two things: pick up the pace or resign yourself to remaining in the workforce.
Saving more late in your working career has its pitfalls as well. Because of the shortened investment horizon, it is hard to take the necessary risks needed to grow your nest egg. Remaining in the workforce, especially with the chances that you will be healthier and live longer, might be the best option of the two.
Here is a list of the agencies and their websites that can further help with the education process.
Reverse Mortgage Education Project AARP Foundation 601 E Street, NW
Washington, DC 20049
1-800-209-8085
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
1-877-FTC-HELP (1-877-382-4357)
Click on Mortgages & Your Home
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