Francis Vayalumkal

WHAT IN THE WORLD IS GOING IN THE MORTGAGE WORLD?
By FRANCIS VAYALUMKAL

If you have watched TV or read a newspaper in the past few weeks, you might have seen all the talks, anxiety and overload of articles regarding the mess in the mortgage industry. I am often asked the question �What�s going on in the mortgage industry?� Several mortgage companies including one of the largest lenders, American Home Mortgage, was forced to shut down operations recently. Other large and small mortgage companies have already shut down and many are in the process. Why? What is happening, and most importantly, what does all this mean to you? I will try to explain things in best ways possible and if some of the jargons confuse you, you know how to contact me.

Over the past several years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional guidelines for home loans. These loans are often called "subprime" or "Alt-A," meaning that they were somewhat riskier in nature than A credit, prime or traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417,000, which is the current maximum loan that can be given using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done � it's called a "jumbo loan" � but the end money comes from private institutions, not the large government- sponsored entities of Fannie and Freddie.

The end investor for subprime or Alt-A loans will charge a premium for taking on a pool of these loans because they know that traditionally they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise � partly because of credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell to get out of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.

But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101,000 for a $100,000 loan that will bear interest, they may only be willing to pay $95,000 for that $100,000 mortgage to account for the risk. Multiply that times thousands upon thousands of loans ... and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a liquidity crisis, and is exactly what happened to American Home Mortgage � there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses ... and eventually had to make the decision to close the doors.

Further, even when a lender is able to take some losses, they may be subject to a "margin call." This means that as their losses and risk premiums increase, the value of their loan portfolio dips. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is diminished. This is similar to margin calls in the stock market. If you have a loan against a stock that is losing value, you will get a "margin call" and need to pay down the loan, as the underlying stock is losing too much value to be considered adequate collateral. So, for the big lenders, as their portfolio is losing value due to increased risk premiums and losses ... the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which exacerbates the problem.

In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared � and likely over-prepared � for increased risk premiums down the road. Though loans above $417,000 are not presently suffering from increased delinquencies like the subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.

What now?

The present situation will likely settle out over the coming year, and the rates on products that have moved so significantly higher now should turn lower down the road as delinquency rates stabilize.

If you or any one you know is in the market for a home loan or will be looking for one in the near future, it is important to take a look at your credit standings and make sure things are clear. This will ensure that you qualify to get the best financing for a home loan when in need of one.

Also, if you are looking for a home loan, make sure you are working with a real qualified mortgage professional who can keep you updated about the market and can get your loan funded. The days of shopping around for unbelievable deals in mortgage are gone. There might still be people who are promising you things that are too good to be true. The likeliness of those people being able to deliver on their promises is low. Dependable mortgage companies and mortgage professionals are still around and it is to your best interest to call one that you can trust to help you in your home financing needs.

Francis Vayalumkal is a loan officer at Market Street Mortgage and can be reached at (813) 932-4578, Ext. 234 or via e-mail at [email protected]

	Nitesh Patel

MONEY AND FINANCE: HOW PARENTS, GRANDPARENTS CAN MINIMIZE ESTATE TAX LIABILITY WITH GIFTS OF LIFE INSURANCE
By NITESH PATEL

Many people underestimate their estate and unknowingly face large tax obligations. Moreover, changes to the estate tax law under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) have only fueled confusion about how to protect assets and use the law to one�s advantage.

Your estate includes everything you own at the time of your death (cash, stocks and bonds, annuities, real estate, retirement benefits, life insurance and even jewelry). Currently, if the estate is valued at more than the $2 million exclusion, an estate tax is imposed on every dollar over this amount. Without proper preparation, a substantial percentage of the estate value can be lost to taxes after death.

The good news is that a well-designed estate plan has the potential to minimize the impact of estate taxes while maximizing the amount that will pass to your heirs. A knowledgeable financial representative can help you find solutions for individual estate plans and discuss effective ways to reduce estate tax exposure.

For example, one useful way to remove assets from your taxable estate is through the gift tax annual exclusion. Annual gifting within the annual exclusion limits allows assets to be removed from an estate without being taxed, and the future value or appreciation from the gift also is estate and gift tax-free.

But, it can get confusing. Under current tax law, annual gifts valued up to $12,000 can be given to any number of people and are excluded from federal gift taxes. The exclusion doubles to $24,000 each year for gifts that a husband and wife make together. In addition to gifts that fall under the annual exclusion limits, additional gifts are exempt from tax during your lifetime or at death as long as they do not exceed a total of $1 million.

Gifts do not need to be given in cash. If you plan to make a gift, consider gifting assets that have the potential to appreciate. That way, you also remove the appreciation of those assets from your estate.

Permanent life insurance is an appreciating asset, which maximizes the use of the exclusion � the value of the gift is based on the premium paid, not the ultimate cash value or death benefit. Leveraging the annual exclusion by purchasing life insurance is an effective way to remove assets from an estate and meet other objectives, such as providing immediate, liquid funds after death to pay expenses.

Permanent life insurance is often an ideal gift for parents or grandparents to make to children and grandchildren. In most cases, if your children own a policy on your life, the proceeds will not be included in your estate. Furthermore, you can use the annual exclusion to make gifts that can be used to pay the annual premiums. But be careful about naming your child or grandchild the owner of a life insurance policy if he or she is not of majority age. It is typically better to have an insurance policy owned by a trust or placed under a custodial arrangement than it is to name a minor child as the owner.

Other unique advantages of life insurance are:

Accumulated cash value can be used for college tuition or to purchase a home
Protection for family members against an economic loss

A good financial representative should help you determine if family gifting is an appropriate solution to reduce your taxable estate. Working in conjunction with your legal and/or tax consultant, he or she can help estimate the value of your estate, determine tax liabilities and offer solutions for your particular situation. This expert should guide you through the kinds of life insurance available and develop an ownership structure to meet your needs.

Nitesh Patel is a financial representative with the Northwestern Mutual Financial Network based in Clearwater for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin). To reach Patel, call (727) 799-3007 or e-mail [email protected].

	Kamlesh Patel

CRUNCHING �EM NUMBERS: keep your eye on the dog, not the wagging tail

By KAMLESH H. PATEL, CPA

Some tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.

Here�s one example of the tax tail wagging the economic dog. Let�s say that you run an unincorporated consulting business. You want some additional tax write-off, so you decide to buy $10,000 of office furniture that you don�t really need. If you�re in the 28 percent bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28 percent of $10,000). But even after the tax break, you�ll still be out of pocket $7,200 ($10,000 less $2,800) � and stuck with furniture that you don�t need.

There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example:

Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.

Someone turns down extra income, because it might push them into a higher tax bracket.

An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

As a general rule, the best tax strategies are those that generate a deduction and leave you in control of your money. This is what happens, for example, with IRA, Keogh, 401(k) and other retirement plans. Strategies that result in tax deferral can also be desirable, since you get to pay your tax bill years from now in usually cheaper, inflated dollars.

understand your company�s breakeven point if you want higher profits

The figures on an income statement report the sales, expenses and net profit or loss of a business. But these figures can be helpful in another way. They can be used to compute the breakeven point for the business. Knowing your breakeven point can help you run your operations more efficiently and profitably.

Simply put, the breakeven point is the sales volume at which the business generates just enough revenue to cover its expenses. While a business that�s breaking even doesn�t have a profit, it�s not losing money either.

How to determine breakeven. To calculate your breakeven point, you�ll need to know three things: sales, variable costs, and your total fixed costs. Variable costs are those that fluctuate with the number of items sold, such as the cost of materials and sales commissions. Within limits, fixed costs do not fluctuate with sales volume (i.e., rent, insurance, and property taxes).

Calculating the breakeven point involves two steps. First, it�s necessary to figure out the amount left over from each sales dollar after the variable expenses have been subtracted. This is known as the contribution margin. Then the contribution margin is divided into your fixed expenses to get the breakeven point.

How to use breakeven. How can you benefit from knowing your breakeven point? First, you�ll be able to manage your business better once you know the sales volume needed to turn a profit. Second, by monitoring your sales, you can accurately predict whether you�re on course to reach your profit goals. Third, you�ll be able to take corrective action more quickly.

There are other benefits too. Using breakeven analysis, you can calculate the sales volume you�ll need to cover the costs of a proposed new product or service. Plus, if you have a desired profit, you can add it to your fixed expenses and calculate the precise sales volume you need to achieve that targeted profit.

safeguard your financial records

Every year, there are natural disasters that remind us how easily we can lose essential tax and financial records. After a disaster, you�re more likely than ever to need certain records to file insurance claims or apply for loans.

It�s smart to take the time to identify key records, make copies, and find a secure place to store them. Here are some suggestions to get you started.

You don�t need to copy every tax and financial record. Your banks, credit card companies, and investment brokerages will have records of your accounts and can probably supply details of recent transactions if needed. Your employer will have current payroll records, and IRA or 401(k) plan trustees will have details of your accounts.

Keep a master list of all account numbers, with a contact phone number for each. That will make it easier to recover information after a disaster. If you handle transactions online, include your user ID and passwords. Keep copies documenting the purchase of your home or investment properties. Also keep records of expenses for remodels or other improvements that change your cost basis in the property.

Your broker should have details of your original investments in stocks or bonds, but copy details of any investments you purchased independently. That includes numbers of U.S. savings bonds that you own. Make sure your will and estate planning documents are stored safely, either at your lawyer�s office or in another secure place.

Consider keeping copies of your last three years� tax returns, even if your tax preparer has duplicates. And finally, include a recent backup disk from your home computer.

The best place to store your records depends on a number of factors. A bank safe deposit box should protect against most disasters. Sometimes, a fireproof home safe is sufficient. Wherever you decide to keep your records, take the time to prepare now.

Kamlesh H. Patel, CPA, can be reached at (813) 289-5512 or (813) 846-5687 or e-mail [email protected] or [email protected].

	Satya Shaw

PROTECTING YOUR RETIREMENT ASSETS
By SATYA B.SHAW, MBA, CPA

A successful retirement does not just happen; you have got to plan for it. The long ramp toward retirement focuses on saving and investing, but once retirement starts emphasis shifts to spending and safeguarding. Even though the greatest challenge in retirement, and probably your greatest fear, is outliving your money, most people spend less time planning their retirement than they do planning a vacation.

What does retirement planning involve? Here are the steps: First, determine what you would ideally like to do in retirement, and then discuss it with your spouse and other loved ones. Will you spend your time traveling, enjoying hobbies, helping others, working part time, or what? Second, estimate the retirement income you'll have from savings, Social Security, pension and all other sources. Third, estimate your expenses making sure to take account of inflation, taxes and health care costs, which are likely to be an increasing part of your budget.

Steps two and three should be done for each five-year period of your retirement and then revised annually. Fourth, if you have more income than needed, you only need to safeguard your investments to make sure they're not lost or shrunk by bad decisions. If you have insufficient money for retirement (expenses exceed income), then you'll need to postpone retirement, work part-time or possibly use a Reverse Mortgage to access the equity in your home. Either way, it is highly recommended that you minimize your exposure to loss and maximize the full potential of your financial resources by working with a financial adviser. They can help you determine the risk you can afford, investment options and how to position your money for best results without sacrificing safety. Retirement is going to be long, filled with uncertainties, including emergencies, and going it alone is one of the greatest risks you can take.

Be realistic in your planning. For example, be aware that for a couple age 65, there is a 50 percent probability that one will live beyond age 90. Acknowledge that even a low rate of inflation can make a big difference in prices over the 20 to 30 years you'll be in retirement. For example, average inflation of 3 percent means $1 today will be worth only 55 cents in 20 years and 41 cents in 30 years. Since 78 million boomers are entering retirement over the next two decades, the price of everything related to retirement, especially health care, is likely to rise faster than overall inflation. Inflation is a cruel tax for those on fixed incomes, and chances are your income in retirement will increase a lot slower than prices.

The boomer explosion is going to overwhelm government-provided services and benefits. This means that the relative benefits of Social Security and Medicare are going to shrink under the pressure of increased retirees. There will simply be more people receiving entitlement benefits than workers paying the bills. Every study, government and private, indicates there will be a shortage of money to support these programs. To pay for this shortfall, the government must raise taxes of all types. The increased taxes, inflation, relative decrease of benefits combined with escalating medical care costs will be especially burdensome for those in retirement without rising incomes from wages and salaries.

If you haven't evaluated it yet, investigate the risk you're taking with your retirement money. Would you have a loss if the stock market lost ground? You might if your money is still in your ex-employers 401(k) plan, or if you own securities, even mutual funds, whose value is determined by the market. Generally, investments in stock have done well long term, but you may need your money before a long time. From November 1973 to October 1974, the S&P stock market index fell 48 percent, and it took over six years to recover. The last bust in the stock market was 2000-2002, and we have yet to fully recover. In the meantime, inflation marches forward with the shrinking dollar purchasing less. Much of your income in retirement is likely to be derived from your savings and investments, and you simply can not afford risk of loss and the compounding of inflation. If you lose some or all of your retirement money to bad investments, you'll increase dramatically your chances of realizing your greatest fear: outliving your money.

How do you safeguard against the challenge of too many years and not enough money? Like law and medicine, financial planning is best left to professionals. Your job in retirement is to enjoy life free of investment worries.

Satya B. Shaw, CPA, can be reached at (813) 842-0345.