However, for most people they have no choice as the plan administrators only permit these options. You can choose from a small range of Mutual Funds or, more rarely, a Self Directed Option.

Given this, the challenge is how to make the best selection from the limited options available.

Here’s a little snippet of historical data that might give a reason for my preference:

For the past 30 years (1978-20070) the U.S. Stock Market has undergone 4 different Bear Markets (a loss of at least 20% in the S&P 500 index). Specifically these were 26%, 33%, 20%, and 49%.

Despite this the average return on an investment tied to the S&P 5oo index over these 30 years has been 13%. (Source. BTN Research).

Given this record my suggestion is that where possible you put your retirement savings into the fund that most closely tracks this index.

Of course, if you can find a Mutual Fund (either Stocks or Bonds) which has done this good over a similar time then go for it.

Buyers Rajan and Sheena have a joint income of $177,000/yr, Average credit scores of 748 and 768, and $98,000 cash available.

They currently own a nice 2 bed 2 bath townhouse in the Blossom Hill area of San Jose. They plan to keep this as a rental property and will have a pre-tax negative cash flow of $900/m.

They have an agreed Purchase Contract for a 4 bed 2 bath Single Family House in the nearby Santa Teresa neighbourhood for $582,500 with $7,500 credits from the Seller for Non-Recurring Closing Costs. They wish to put 10% down and want a 3 or 5 year fixed loan.

PROBLEM:

In today’s crazy world of Mortgage Banking the only loan offered is a 30 year fixed at 6.5% for 1 point, with Private Mortgage Insurance of$270/m. For this to work they would have had to increase their down payment by approx $15,000, money they wish to use for some re-modeling in their new home.

SOLUTION:

Tell them to call for an appointment with their Credit Union Loan Officer, in this case Technology Credit Union http://www.techcu.com/personal/ After this meeting we now have on offer a Portfolio 3 year fixed loan at 5.75%, for I point and PMI at $227/m.

RESULT:

They not only do not have to increase their down payment, but they are spending $297/m less.

CONCLUSION:

Make sure your Buyers are checking with their local Credit Union when getting Pre-Qualified.

The “bad”? news is that it reduces the inheritance of the kid’s.

Here’s an example from life.

John and Jean had been married 48 years when his physical health began to fail, along with an increasing level of dementia. He was consoled by knowing that his  pension would allow Jean to stay in their home as long as she wished. He was a long serving pilot with United Airlines and had a decent pension with good survivor benefits. Jean was in good health and could expect to long outlive him.

One day a letter arrived from John’s pension administrators informing him that as a result of a settlement in his ex employers bankruptcy proceedins the survivor benefit was no longer covered. This was disastrous. It would mean that upon his death the house would have to be sold to provide the money for Jean to live the rest of her life on. She desperately wanted to stay in the house with her lovely gardens, and surrounded by all the friends from their many happy years there.

I was asked for suggestions which would keep her in the house, and in the financial comfort needed to enjoy it.

In truth there was only one real option.We did a reverse mortgage which gave us $319,000. On the advice of my Financial Planner colleague the bulk of this was invested in an Index Linked Annuity with a Capital Preservation guarantee clause, and a 15 year average annual return of 8.75%. This would provide the additional income required.

The 2 adult children were delighted with this result as neither of them had the ability to have their mother live with them. They fully understood that when she died or moved out of the house the mortgage would have to be paid off, either by selling or refinancing, but until then she had no payments to make.

As with all tools the reverse mortgage can be abused. However, there are many occasions where it is the means for older folks to enjoy their later life in the comfort they deserve.

There was a final twist to this story. About a month after this was all completed another letter arrived from the Pension Administrator announcing that John could take a one- time lump sum payoff from his pension. The amount was $969,000. Needless to say this was immediately accepted and invested wisely.

It was intended to provide the mortgage borrower with a simple way to compare the real costs of different mortgages. For example, is the low interest rate high points approach better than the High interest rate lower points? Unfortunately the way it was designed is badly flawed. It not only fails in this primary goal. it also allows the numbers to be manipulated in such a way that the borrower can take the low APR option but end up paying much more for the loan, and losing some tax benefits.

A detailed explanation of the problems with this legistlation would take another couple of pages, but if anyone is really interested drop me an e-mail and I’ll happily give you the gory details.

A multiplicity of State, County, and City programs are available and in many cases can be used simultaneously to make housing much more affordable than you would ever know. Even the I.R.S. has got into the game.

Some of these programs provide for an 80% first mortgage, while others provide a wide range of down payment assistance for the remaining 20%. These cover a wide range of strategies from equity sharing to straight cash grants. Often more than one of these will be used to provide the 100% needed. 

It is important to use a mortgage broker familiar with all of these programs as the process needs to be co-ordinated with several different agencies.

Rather than try to summarize them all here are links to as many web sites as I am aware of, so do a little homework and contact me with specific questions:

STATE PROGRAMS

0 CALHFA. CALifornia Housing Finance Agency. http://www.calhfa.ca.gov/ This State Agency  is the most common provider of the 80% base loan as they partner with most of the City and County programs.

CITY PROGRAMS

0 SAN JOSE. http://www.sjhousing.org/program/homebuyer.html has info on great programs for school district teachers, plus faculty and staff of San Jose State University, and down payment assistance on 16 new construction developments. http://www.sjhousing.org/program/HBList.html.

0 Santa Clara City. http://santaclaraca.gov/plan_inspection/first_time_buyer.html for info specifically for first time buyers. Also http://santaclaraca.gov/pdf/collateral/Santa-Clara-Model.pdf for a presentation about the Citys BMP (Below Market Price program). You will find the description beginning on page 10 of the presentation slides.

FEDERAL PROGRAMS

0 FHA http://www.fha.com/. A huge web site dealing with the best loans available today for buyers who do not meet the specific requirements for the first time programs. 3% down and flexible qualifying make this the first choice. For a snapshot see http://mccordrealtyservices.com/2008/06/08/fha-the-new-mortgage-of-choice/

0 MCC (Mortgage Credit Certificates). http://www.sccgov.org/SCC/docs/Affordable%20Housing%20Office%20of%20(DEP)/attachments/MCC_Brochure_2008.pdf. This is a dollar for dollar reduction of Federal Income Tax in an amount equal to 15% of the total mortgage interest paid each year.

The Pending to Listing ratios for Santa Clara Valley continues to get more favourable each month. This is the most credible statistic available for tracking market trends and is currently better than it was 12 months ago. I have seen nothing in the Murky News, or heard it mentioned on the TV or Radio.

The truth is that the current problems are concentrated geographically and have not wiped out Real Estate values all over the State.

Have prices in Silicon Valley gone down. Yes in general, but only to the extent of correcting for a out of control boom.

Is now a good time to buy. Yes, in my part of the world.

NOTE: I’ll follow up shortly with info on some super 1st time buyer programs for the Counties and Cities of Silicon Valley. Note: These are NOT low income programs. More to follow.

Here are numbers for this period:

Decade of the 50’s - increased by 24%

Decade of the 60’s - increased by 28%

Decade of the 70’s - increased by 103%

Decade of the 80’s - increased by 64%

Decade of the 90’s - increased by 33%

Decade of the 00’s - increased by 25% so far 2000 through 2007.

2008 does not look good.

It’s rather interesting to map the Presidents into these time frames.

I know of 3 couples who used this strategy by moving into the investment property less than a year after aquiring it, then sold it 2 years later. Each was given different advice from a tax advisor as to how long it had to have been an investment property before they could convert it into a principal residence.

Recently passed legislation H.R. 4520 tightened up the requirements for this type of transaction.  http://www.tellurideareahomes.com/news/news_1031.html

Now you must have owned the property for at least 5 years and used it as your principal residence for at least 2 of those years before you can claim the IRC 121 exclusion of capital gains.

This strategy is still a very valuable tool to the Real Estate investor but it makes it even more important to be sure you are being advised by a specialist Exchange Company that is fully informed on all aspects of the law.

 I can personally recommend OREXCO http://www.orexco1031.com/ a subsiduary of Old Republic Title Co.

Please be aware that i am neither a licensed tax advisor or an Attorney, and be sure to obtain help from a qualified professional in dealing with these matters.

The meat of this Act is aimed at modifying and building confidence in the Macro Economic systems at the heart of the Mortgage Industry. These changes deal with the various controlled or  sponsored Government agencies (Fannie Mae, Freddy Mac, H.U.D, and the newly created FHFA, and do not directly affect the individual home owner.

At the individual level there are several changes but just 2 significant ones.

First the positive:

An up to $7,500 TAX CREDIT (a dollar for dollar reduction from your tax liability)  for First Time Homebuyers (people who have not owned a home during the previous 3 years).

This will apply to all qualified purchases from April 8th, 2008 and June 30th, 2009. This amount is actually an interest free loan and is repayable over 15 years at approximately $500 per year.

A strong A+ grade for this.

Second the less positive:

The FHA Foreclosure Rescue program is designed to help certain homeowners with problematic loans avoid foreclosure by refinancing into a new 30 year fixed mortgage for 90% of the current value.

Unfortunately this requires the holder(s) of the current mortgage(s) to write of a large chunk of their loans. It is in effect a government sponsored Short Sale Program which requires the vountary co-operation of the current Lenders. 

I see little chance af significant participation by the Banks involved. 

This is a well intentioned but poorly designed plan aimed more at the appearance of positive action rather than serious reform. In other words a Political, not a practical program.

A C- grade at best.

On Jan 1st, 1934 during the Great Depression 44% of all U.S. mortgages were in default.

On April 31st, 2008 the number was 4.5%.  

I accept we have a major problem in our financial system.

I do not believe it is correct to describe this as a “Foreclosure Crisis.”

It should be more properly referred to as a Liquidity Crisis. The number of current and possible foreclosures is merely the catalyst that exposed the stupid behaviour of a significant number of Banks, both at the retail level, and the Wall Street Investment banks that oiled the Secondary Market.