The Freedom Factory

With the increase in the number of foreclosures an increasing number of the borrowers are turning to loan modification programs. Working with your lender, loan modification can prevent foreclosure and also help you in save some cash. Continue Reading

Ever heard of the crash in subprime mortgages? In 2008, this was the primary cause behind the financial and credit crises. The reason: too many loans to people who could not afford them. One government department, in particular, was very much responsible for getting property into the hands of large numbers of people who should not have been buying: U.S. Department of Housing and Urban Development (HUD). HUD’s new solution to “fixing” the housing crisis: make it easier for subprime buyers to keep on buying!

There were various reasons for the high number of loans to unqualified buyers:

• Low interest rates set by the Federal Reserve
• Explosive growth in the money supply following 9/11
• Congressional mandates to Fannie Mae and Freddie Mac to expand the percentage of subprime debt held in their portfolios
• Expansion of HUD programs to make it easy for low-income buyers to obtain loans

Wall Street geniuses came up with some clever methods for splices up these loans and trading them on secondary markets, adding liquidity and making the engineered instruments look better than the subprime debt of which they were comprised. The premise for securitization is great, but the underlying risks posed by this inflated financial system were not recognized by far too many parties to these transactions.

What happened was an implosion of debt instruments related to subprime mortgages. Now, after trillions of dollars of losses, our currency and entire financial system in jeopardy, the children of Congress are tossing more money at HUD to extend more loans that will end up bad. Are these people insane or trying to bankrupt us all?

Harvard’s endowment is down 22% in the last 4 months and going to finish the yr down ~ 30%.  It was worth $37B in June and has lost > $8B since then.  The fund has been in the news alot in recent yrs for its stellar performance.  The fund has returned an average annualized return of 13.8% over the last 10 yrs and 17.6% over the last 5 yrs.  In the last 40 yrs, the fund has only had 4 negative yrs, with 3 of those being down less than 3%.  Its worst yr was 1974 when it returned negative 12.2%.  

In years past, they did extremely well due to their real assets and foreign stocks (and heavy emerging market exposure).  But I guess all good things come to an end.  This yr has not been a good one for them.  Since summer their returns are just about equal to those of the S&P 500. 

Their fiscal year goes from July 1 to June 30.  Their holdings as of June 30 2008 were:

• 12% US equities
• 20% foreign equities
• 11% private equities
• 9% bonds
• 17% hedge funds
• 31% real assets (timber land, agricultural land, real estate)

You can read more about the fund here.

Turning 30 is a big milestone in your life.  It is kind of a point at which you should change from a guy into a man.  I know you graduate college in your early 20′s, but society allows you some time to go from college graduate to a responsible man.  I think that by the time you turn the big 3-0, society expects you to be grown up. 

I am going to list some things you should have accomplished by the time you turn 30.  Continue Reading

Yesterday’s prose was very simplistic and did not take into account many of the variables involved in the home buying process.  Some of them play a big part in the equation and account for large swings in dollar amounts. 

Below is the math which should include all of the variables involved.  My thinking may not be perfect so please comment and let me know what thoughts you have.

I think in the end it is very clear which investment is the better one financially.  But many people like to own their own home.  Can’t do that if you rent your whole life.  And many people would not save the difference between rent and buying so in a way it is a forced savings plan.  And if buying a home can force people to save nearly $1M dollars, then they are likely much better off than if they rented (b/c they wouldn’t have saved that $1M).  If you are disciplined and can save, I think you can do better with your money than the forced saving plan of buying a home. Continue Reading

Community Organizer (CO) Barack Obama has repeatedly stated that this financial crisis proves a fundamental failure of our economic system. He’s right. Although, I doubt he realizes exactly why. CO Obama believes these hard times point to the failure of free enterprise, markets, and Capitalism. On that count, he’s incorrect…nearly treasonously so.  We are witnessing the results of decades of bad government policy.  Social engineering on so many convoluted levels has finally caused such a severe blow to our society that we are finally taking notice. The best explanation comes from Harvard University economist, Jeffrey A. Miron. Continue Reading

In Jeremy Siegel’s book, “Stocks For the Long Run”, he finds that real returns of stocks have averaged 7% since 1870.  Real returns are returns after inflation is taken into account.  For example, if inflation is 3% and a stock returns 10% in a given yr, then the real return would be 7% (10% – 3%).  And real returns are the only returns that matter, because they measure an increase in spending power.  If inflation is 3% and a stock returns 3%, then you haven’t improved your position at all.  You can purchase exactly what you could purchase the yr prior.  In conclusion, stocks increase in value 7% per yr because that is how fast companies tend to grow their profits. 

Houses have their own version of profits: rents.  These rents are profits, either realized if someone is paying you to rent the house or implied if you are not paying rent to live there.  House prices and rents have been closely correlated throughout history, both increasing at the rate of inflation or about 3% a yr.  This number is low because it is hard for a house to think up ways to increase its profits.  Robert Shiller, the Yale economist who successfully predicted the stock market crash of 2000 in his book “Irrational Exuberance”, has found that home returns since 1900 would have been zero if not for 2 brief periods in history.  Even if the two periods, one immediately following WWII and the other from 2000 to 2005, are included they would only boost real returns to 1% per annum.  If you’d like to see his data sets, they can be found here: http://www.econ.yale.edu/~shiller/data.htm.  Continue Reading

I read an article today that brought up two great points: Housing bubbles are worse in localities with high land use regulations, and federal housing policies geared towards subsidizing low-income homebuyers encourage folks who can’t afford to buy to do so anyway. Tag on ridiculously low federal funds interest rates for way too long and you have a recipe for disaster. Continue Reading