Tightening the thumbscrews, one turn at a time

Anyone remember that crazy time toward the end of 2008 when all of our portfolios fell apart? Through a clever combination of whiskey and denial, most of us have managed to effectively neutral­ize any memory of the actual happenings of the crash. All we know is that we landed somewhere un­pleasant and the banks are somehow completely to blame.

Well, if you’ll recall, one of the big events that happened back then was that Fed Chairman Ben Ber­nanke swooped in on his mighty steed and said, “Hey AIG: in order to ease your burden here, I’ll make the taxpayers buy all your faulty and most likely worthless assets so you can go back to frolick­ing around the globe insuring whatever it is you people insure.”

And at AIG there was much rejoicing. Yaaaaaaaay.

However, on Main Street (a clever way of saying EVERYWHERE else other than Wall Street), there was not much rejoicing. It’s like we just paid top dollar for steaming piles of… use your imagination.

Back in the day, this kind of thing would have been dealt with by throwing Big Ben into the river. If he floated, than he was a witch and should be burned at the stake. And if he sank, well, then we proba­bly shouldn’t have drowned him. Oops.

“How could our mighty leader lead us into such a poor deal?” we asked. Well, turns out that we’re most likely going to profit from that deal. Yeah. The asset values came back. Huh. Didn’t see that coming. I mention this story now because Obama just got done expounding the proposed rules that were going to be applied to banks that are deemed ’too big to fail’ in order to reduce their risk-taking.

Do I think it’s a good idea or a bad idea? I dunno. But neither do you OR the talking heads on our favorite news networks. It’s history being made. Are we going to swing from a period of gross under-regulation to a time of potential over-regulation? Probably. History would tell us that these patterns tend to repeat themselves. But regardless, the powers that be are doing what they feel is best for their constituency. We’ll just have to watch and see where the chips fall.

In mortgage news, the Federal Housing Administration (FHA) just had a press release itemizing some proposed changes to their lending practices. The big three to watch out for:

1) Stricter credit requirements

2) The maximum allowable seller contribution towards closing costs will be reduced from 6% to 3%

3) The Upfront Mortgage Insurance Premium (UFMIP) cost will go up from 1.75% to 2.25%

So as not to belabor the point, UFMIP is essentially a closing cost required on all FHA loans that can be financed in. Bottom line: the loan is getting more expensive. The credit tightening and reduction in seller contribution is because the banks do not want to expose themselves to writing any more bad loans. This means that a prospective buyer will have to have higher credit scores and will have to come up with more money at closing to buy a home.

Consider yourselves warned. Right now we are experiencing the time we’ll soon refer to as the ‘Good Ol’ Days’. Enjoy them while they last.

Marching through molasses

Optimism abounded this week as everyone held their breath and waited for Friday’s jobs report num­bers to come out. The universal hope was that we would see job growth in December of 2009, which would be the 1st growth we’ve experienced in 2 years.

Did we? Could we? Hope and change?

Nah. 85,000 more jobs fell off a cliff Wile E. Coyote-style. Unemployment held steady at 10%. The funny part was that November’s job numbers were revised, showing a gain of 4,000 jobs. So...yay! We finally had a month-over-month jobs increase...barely.

Alright, alright, to put things in perspective, 1st quarter 2009 we lost an average of 691,000 jobs per month. So, there is something huge to be said about things being “not as bad”.

It’s rough running this ship right now, guys and gals. This isn’t a normal, natural business cycle we’re experiencing. It is a complete restructuring of our economic base, incited by a period of wild excess and shadowy business practices. Lots of variables and moving targets are out there. Our country had become an easy money junkie, and withdrawal from that false system of profit-churning is going to be painful. And it’s going to last a while. My hat is off to our leadership for doing their best in battling their way through this mess.

Why do I care about job growth? Home purchasing demand. If John Doe has no job, John isn’t going to buy a house or, worse yet, will stop paying on the house he already has. If John doesn’t buy a house or loses the one he’s in, demand is reduced and home prices will decrease as a result. And that is no good for everyone.

There’s a ton of you out there that want to become homeowners or know people who want to become homeowners, but for some reason or another they think that they can’t. News flash: many of them are dead-on correct. Lending guidelines are tough and job insecurity abounds. A lot of would-be home­owners have their feet firmly cemented in their own private iteration of our economic quagmire. But being unqualifiable for a mortgage can be nothing more than a temporary phenomenon if you choose for it to be.

If you have a job right now: great. But the old-fashioned punch-in, punch-out, repeat-until-a-happy-and-comfortable-retirement method doesn’t work on its own. In addition to a lucrative career, you need to properly manage your assets and your debt. Whether you have the goal of buying a place or simply need an extra set of eyes on your financial life to provide some pragmatic guidance, I’m here to help. The advice is free to my friends and affiliates, and sometimes a little guidance can make a huge difference in your family’s financial trajectory. Wherever you’re at, it only makes sense to start mov­ing one step at a time towards where you want to be. And I want to be your hiking buddy throughout the climb.