Do I walk away?

Should I walk from my mortgage is a very common question right now.  People are wondering about the moral ethics behind walking away from a loan.  I have my thoughts about it.  I found this article on His blog.  He has a very interesting take on this situation.

This article is written by a guy named Mike Shedlock.

Businesses Advised To Walk Away

Before exploring legal advice being given to banks about walking away, let’s review one more time the Moral Obligations Of Walking Away.

In a nutshell I made a case that “business is business” and yes, I encourage people to walk away now if they are going to be forced to do it later anyway. I also encourage people to walk away if they are hugely underwater on their homes.

Banks knowingly and willingly gave homeowners a free PUT option when they financed homes at zero percent down. It’s just a business decision. Businesses break contracts all the time.

In the “moral Obligations” post I also claimed there would be a national referendum on walking away. A few days later an ABC Poll showed that US citizens decided that walking away from Iraq was the single most important thing we could do economically for the country.

The masses have finally caught on and that is one reason why I declared Obama: The Next President Of The United States.

Walking Away Retail Style

In Does The Shopping Center Economic Model Work? we took a look at trends in retail. Consider what Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research said two days ago:

“Some companies are closing stores to increase profitability, some are doing it just to stay alive. A lot of retailers already had their plans for 2008 laid out, had already invested in signed leases, ground-breakings, pre-opening, etc, so they couldn’t just stop those new stores on a dime. Looking back on that, they’re going to wish they had just walked away and paid whatever it would have cost them to stop the process. ….. For the next decade, retailers are not going to have to open a brand new store because there’s going to be so many empty ones that need to be filled.”

The interesting thing from the morality standpoint is that some stores are walking away, not to stay in business but to increase profitability. Others wished they walked away right during construction to say costs. Are such decisions morality issues or business decisions?

Wilson’s Leather Walks Away From 160 Stores

“Sandi”, one of my readers, sent me a note this morning that Wilsons Leather will close up to 160 mall locations.

Wilsons The Leather Experts Inc. will close the majority of its 260 mall locations and cut more than 1,000 jobs, the clothing retailer said Friday.

Wilsons will keep 100 stores open, revamping them under a “Studio” concept focused on fashion accessories for women. All stores should be remodeled by August.

About 938 store-related jobs and 64 positions at the company’s corporate headquarters, overseas offices and distribution center in Brooklyn Park, Minn., will be cut.

Clearly Wilson’s Leather had contractual agreements on all those leases. Is there a morality issue here when they just walk away like that?

Banks advised to walk away from big deals

Today, the Financial Times is reporting Banks advised to walk away from big deals.

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”

Oh! The Morality!

Note the irony. Numerous programs are being put into place in an attempt by banks and mortgage holders to encourage home owners to stay debt slaves forever, while lawyers are advising banks to walk away from contracts and pay the penalty of loss of reputation.

Exactly how does this differ from homeowners choosing to walk away from their obligations with a price of “loss in reputation” otherwise known as a black mark on their credit score?

Here’s the answer: There is no difference, and that is precisely why all these programs to keep homeowners in their homes when it is a bad economic decision for them to stay, will fail.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named said Mish, who was willing to be named. “The banks Consumers have so many issues with their balance sheets that they are considering a new policy.”

If it’s in your best interest to walk, and you are willing to pay the penalty price, then walk.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Ask The Expert. Umm?

Here is an article written by By Walter Updegrave, Money Magazine senior editor.  I want to point out some of the flaws in traditional thinking.  As I add my comments to this article I want to give my disclaimer…My comments are not aimed at the writer or the magazine.  I don’t know him.  My aim is at traditional thinking and ideologies.  The article will be in black and my comments will be in red.

Do you want to be your own banker?

Buying an ‘infinite banking’ life insurance policy may not be the best way to build long-term wealth for retirement.

By Walter Updegrave, Money Magazine senior editor

December 30, 2008: 12:27 PM ET

NEW YORK (Money) — Question: An adviser has been telling me about a concept that he calls “infinite banking.” Apparently, it involves using a life insurance policy to become my own banker. It seems like a good idea, but something doesn’t seem quite right to me. Do I have cause for concern? – Matt, St. Louis, Missouri

Answer: This concept that your adviser is touting has nothing to do with banking, It has everything to do with banking…you are doing the same thing banks do which is turn your money over and over and capture interest on loans. at least not in the sense that any normal person thinks of it.  Is normal person thinking what has gotten everyone in the position they are in i.e. 401k’s down 50% and foreclosures out of control. And the only thing “infinite” about it, in my opinion,  Opinions are the problem with all the advice that has been given over the last 30 years.  Why don’t we find out the facts when making life decisions. is that it represents yet another in the seemingly infinite number of ways people can come up with to induce you to invest in life insurance.  I guess new ideas are out of the question since all of the traditional ones have done so well.

Now, I want to be clear. I have nothing against life insurance. Virtually everyone who has family members depending on him or her for their livelihood should have a life insurance policy,  No one needs life insurance…it’s a want. as it’s the only financial product that can replace income when a breadwinner dies.

I think the best way for the overwhelming majority of people to get the valuable protection life insurance affords is through a low-cost term insurance policy, Has anybody ever stopped to prove to you that it’s the best way to get protection? although in some circumstances other types of policies can also make sense.

The downside

What I do object to, however, is advisers employing mumbo-jumbo and financial sleight of hand to convince people that they should be plowing money into certain types of life insurance policies when they’re likely better off in more conventional investments or simply funding regular old retirement plans like 401(k)s and IRAs.  If funding a 401k instead is better then why don’t we just go to Vegas and put it all on red…at least you could have free drinks.  It seems like “mumbo-jumbo to tell someone to keep funneling money into a stock market that just lost 40-50% of it’s value and there is no end in sight.

When you strip away the gibberish surrounding pitches like infinite banking,  How about Dollar Cost Averaging, Diversification, Asset Allocation and Buy Term and Invest the Difference.  Everyone of these “pitches” have FAILED. it basically comes down to this: You should invest in cash-value life insurance because it pays dividends Remember to state Non-Guaranteed Dividends (which aren’t taxed as long as they remain within the policy) and you can borrow against the policy. Somehow, these dividends and the ability to borrow are supposed to make you a banker. Right.  If the homework would have been done before this statement it would have been found that those thing are not what makes you a banker.

At its core, this spiel is similar to other questionable life insurance sales tactics I’ve written about, such as the “7702 (a) Private Plan” pitch, which essentially couches life insurance policies as an IRS-approved retirement plan.  Do your homework on these policies.

I don’t know what, if any, specifics this adviser discussed with you. But what these sorts of sales presentations tend to gloss over are the high costs of investing via life insurance The truth is that as a long term strategy term insurance is the most expensive way to buy life insurance…If you don’t die during the specified time period then you have wasted all of those premiums plus what you could have done with them somewhere else and the fact that borrowing from a policy can have serious downsides.  If not managed correctly.  I would say it’s a lot cheaper then losing 40% of my retirement account.(See more on those drawbacks.)

To be honest, I don’t think this sort of proposal is worth a lot of serious consideration. Obviously there was not much serious effort put into research before writing this article. But if you’re sufficiently intrigued by it and the adviser has given you concrete figures and projections, you can always hire a financial planner on an hourly fee basis to do an independent analysis.  The same financial planner that told me to max out my 401k and fund my Roth IRA.  The same one who told me that Assett Allocation will keep my money going up even when the markets down.  The one who told me I would have enough to retire at a certain age and then 2008 happened. The same one that projected out my future using a 12% return because that was the average and the market will always be on an upward trend. The one who told me to save for my kids education in mutual funds. I would say that I don’t think I would spend any money on planning that has been proven not to work.

Lower life insurance costs

Ultimately, I think what you’ll find is that your best shot at building long-term wealth for retirement and your overall financial security is to keep your life insurance costs down by buying a term policy. That will free up more money that you can then contribute to tax-advantaged retirement accounts like 401(k)s and IRAs (preferably investing that money in low-cost investments like those on our Money 70 list of recommended mutual funds and ETFs).  Thats interesting that after  beating up a legit strategy that was not fairly looked into…There is a reccomendation to buy specific mutual funds HMM?  If you look hard enough you will find that there is always some financial motivation to peoples advice.

So the next time this or any other adviser starts telling you he’s going to let you in on some little-known and unique strategy that will put you on the road to riches, just remember: There is no magical path to financial success. There are, however, an infinite number of ways you can get hurt looking for one.  Or maybe we could start thinking for ourselves instead of others doing the thinking for us.

Who is David Walker?

Here is a 30 minute version of I.O.U.S.A.

Every American should watch this.  It is time to stop turning our heads to the problems we are heading for.

Demographic Changes or Buy The Right Stock?

In 3000 days, about two-thirds of the now-working population will be 60 years old or older.  We know this with certainty.  That only leaves one-third of the now-working population to pay for all of the government social programs like medicaid, medicare and social security.

Let’s ask a few questions about our future.

What about money flowing into the stock market?  If you take a look at the history of the market you would see that it is like a teeter-totter.  It goes up then down over and over.  From 1980 to 2000 there were only 4 negative years…Strange?  What could have caused that?  Maybe it could have been that 401ks were introduced in the early 80′s and the baby boomers were throwing a lot of money into them.  So what about the next 10 years?  There will be more money coming out of 401ks than going in due to retiring baby boomers.  So could the market go the opposite way in the future?

Haven’t we always been taught to start selling our stocks and going into cash as we get closer to retirement?  How might that then affect the stock market?

What about all the baby boomers selling their 5,000 square foot homes to down size into condos?  How could that affect the real estate market?

There are a lot of things we should consider about the future changes of our demographics.

We should get away from traditional thinking i.e. (Buy the right stock at the right time.)  We need to realize that the biggest impact of our financial futures will be the changing demographics on our country.

Here is an interesting news clip about the aging population…

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=3906861&cl=10749765&ch=4226723&src=news