What exactly is a Liar’s Loan? A Liar’s Loan is another term for the low-doc or no-doc loan. It’s also called stated income loan. Here is the quote from LA Times:

Industry insiders have a nickname for low-doc and no-doc mortgages: liar’s loans. The phrase reflects the suspicion that many of the borrowers who get such loans don’t have the income or assets to qualify the old-fashioned way.

Who in their right minds will opt for paying higher interest rate instead of documenting their income? Unless they are like self-employed businessman who may have a hard time for documentation, they are probably unqualified liars.

What’s some statistics of lying on such loans? Only about 10% of people were telling truth in an example.

One lender recently compared 100 stated-income loans with the borrowers’ tax returns and found that only 10 of the borrowers were telling the truth about their wages, according to Mortgage Asset Research Institute, a division of data firm ChoicePoint Inc.

Sixty of the borrowers had exaggerated their incomes by more than 50%, according to the institute, which didn’t identify the lender.

I don’t know what’s the percentage of self-employed, but I bet that there cannot be one third of Californians all self-employed and need such kind of loans?

As the state’s boom went on, the mortgages became so popular that they now account for a third of new loans, according to data tracking firm First American LoanPerformance.

So it goes without saying that a significant percentage of these loans most likely will crumble down at the expenses of others, when the boom turns bust.

Our American values have sinked so low that not only lying on the loans is perfectly okay for many people, but getting free rides from loan applicants makes perfect business sense. I contacted a homebuilder designated lender once. The lender gave me a higher interest rate quote, and told me that they only do no-doc loans. But the lender asked me whether I can document the loan. I said yes. And then, the lender dared asking me whether I can document the loan for them, even though I don’t need to document it. And I said NO. I asked the lender, “why should I document my income for you while not getting a better interest rate?” Apparently, most newhome buyers have being taken advantages without knowing it.

For the poor renters who have been leap-frogged by such homebuying liars or “investors”, I can share with you a trick. This is just what I heard, and I did not verify this. In the state of California, the state laws favor tenants than landlords (this is a fact). I heard that someone was simply paying rent every other month, effectively cutting the rent price in half, and the landlord couldn’t get him out for a very long time because he was making partial payments.

Californians in the golden state? Liars against cheaters? Is this the state that we’re in? I guess if Californians can sell their FICO score of 680 for some fraud housing ATM money of half of a million dollar (or probably less), they will all flock to do it. Have you read this from Housing Panic blog? A 24-year old kid lied through all the loan doc and has over two millions in real estate, but his networth is negative $200K. Think hard about who is going to take up the tab, about what ramifications these incidents have on the society? Who will be the real losers when the housing bubble bursts?

Do you choose money or your values? You don’t need to let me know. I’m certain you know about it, and if you don’t know, don’t worry. God knows all about it.

Sorry, I just can’t make it today. Had a hectic day at doctor’s clinic. The stupid nurse couldn’t even measure temperature for my two sons. She said both had fevers of 101 Fahrenheit degree, while they actually didn’t have any fevers after the doctor measured them using an electronic device. I’m still waiting for doctor’s call to correct his previous diagnosis.

If someone can’t even measure temperature, I think most likely he or she cannot be qualified to be a nurse.

To all bloggers,

Please submit your entries through BlogCarnival for Festival of Stocks. It’s a cool carnival set up by George at Fat Pitch Financials. Thanks for your participation.

Frugal

Better open your Bank CD now rather than later. If you don’t need to use the money, and don’t want to put the money into stock market or any investment, I would suggest you to open a CD that is longer than 1 year. Here is the link for 1-year CD and 2-year CD from BankRate.com. The interest rates in money market accounts will immediately come down once Fed starts to cut short term interest rates.

The current bond yields are indicating a strong possibility of interest rate cut at the end of this year or early next year. 10-year treasury bond yield is down at 4.6%, while 30-year treasury bond yield is at 4.73%. The Fed short term rate however is at 5.25%. Make any sense to you? This is the so called inverted yield curve which is forecasting an economic slowdown and possibly a recession if Fed doesn’t cut rate soon.

It looks like we are back in the goldilocks economy. Everything appears to be great. $US is not falling, but actually rallied. Mortgage rates will be down because of the fall in treasury bond yields. The bond yields can allow the stock market to sport with a higher P/E ratio, relative to the unattractive bonds. Crude oils has fallen big time, and same for gold, while stock market indexes are setting new yearly highs if not all time high. I almost want to say that it’s too good to be true. Assuming that the price for commodity stays down, and Fed can stop housing to slide, we will have a soft landing.

According to Hoenig, one of the Fed officials, inflation has peaked, and will decline going forward. But I am not so sure at all. Yes, Fed wants us to believe that inflation has peaked and is totally under control. With such belief, bond market can stay strong, and Fed doesn’t need to keep increasing interest rates.

I believe all signs are still pointing to greater inflation. That is the only way out for a debtor nation like US. The only game in town is the confidence game. Keeping the confidence up, then US dollar and bond markets will be strong, and therefore stock and housing market will not weaken too much.

When a stock newsletter tries to play game with the displayed performance number, you know there can be only one reason: the picks are not enticing enough for the readers, and needed extra boost. That’s the case with www.GoldDrivers.com.

I started subscribing to it at the very beginning of its “premium service” since the end of year of 2005. Initially, Eric Hommelberg had two lists. One is portfolio list, and another is watch list. Probably because the things that he added to watch list were going up a lot since gold was in a strong bull market. So around the beginning of 2006, he lumped the two lists into one list, and used the good performance from the watch list as part of his new portfolio/watch list. Although he only added those stocks to his watch list, and did not formally recommend those stocks, his new list of portfolio/watch list is full of good performing stocks.

And then in June 2006, he no longer display the full list of his recommendation of discovery portfolio and exploration portfolio. Instead in the newsletter and website, he only displays Discovery Top-10 portfolio. He still does new recommendations that go into the “Top-10″ portfolio list. But by not showing all those bad performers, an image of good performance can be created. If you recommend sufficient number of stocks, probabilistically speaking your chances of recommending a good performer goes up. And then if you selectively filter out the bad ones, certainly the list will be all good performers.

Nothing in any of the list in his newsletters is bogus. But the image created through selective lumping and filtering at different time is very deceiving. I just hate newsletters when they start to mess around with the images of their performance. If you cannot even be straight and forward about your performance record, what other things I can trust. Yes, if you dig hard enough, you may still find out the historical performance record. But as soon as a newsletter gives you that tough job of producing the actual performance number, you know that probably such numbers are not as enticing as the newsletter wants you to believe in.

Have I made money from www.golddrivers.com? Nope. His original portfolio/watch list is more than 20 small cap stocks, mostly trading at Canadian markets. It’s tough for an individual to pay $30+ commission each to buy every recommended stock. Some of his timing has been off too. He projected HUI to reach 430, while HUI peaked at around 400. Calls to buy a couple of stocks in 2006 has resulted (not small) losses too (but a few did make money).

Seeing that the lists in golddriver.com newsletter are filtered without displaying the original lists, I don’t think I will subscribe to his newsletter again. I don’t want to deal with people who try to do a good marketing. I want to deal with people who are straightforward about themselves.

I think I learned one more thing about stock newsletters. Never go for some newsletters that have LOTS of recommendation. First, a lot of recommendation is simply not practical for any readers to buy into. Secondly, lots of recommendation are usually prone to be filtered in some appealing way.

That’s my $99 subscription fee + all of my stock losses.

P.S. I’ve got all of the past golddriver.com newsletters saved to prove my case. Only if you’re so interested to find out the details, I can share bits with you as not to violate any copyrights.

Some good readings from the internet:

1. Have you seen Mad Money by Jim Cramer? An academic study showed that Cramer’s effect that makes recommended stocks jumped by 2% to 5%, and later reverted back to the original price, are because suckers bought into the Cramer hype at higher prices. Certainly the best way to lose 2% to 5% of your money.
2. Fall in the gasoline price could be a conspiracy by Goldman Sachs! A tweak in the GSCI commodity index, widely followed by some mutual funds and institutions, coincide with the recent peak of gasoline price. Not sure how gasoline can go from 8.45% down to 2.3%. 2.3% sounds too little to me for a commodity mix.
3. And Mark Hulbert does it again! He is the BEST columnist at MarketWatch.com. Pretty much every article by him is an excellent analysis. Housing market isn’t necessarily a predictor of stock movement. I’m not sure why I fell into the trap last week. Probably I wasn’t paying enough attention. To have any such strong predictor on the stock market is simply impossible. Otherwise, someone could have made billions of dollars just from the predicted chart.

P.S. You probably guess it right. I’m exhausted from my work. So I’m putting up a reading list instead. I haven’t replied on some comments, not to mention that I have no time to blog. My work is close to a project completion, and I’m extra busy.

To all the new visitors, please visit my SITEMAP for more good readings.

When you are in a process of finding a money manager or financial advisor, do you know what to expect and ask? Letting other people to manage your money may be one of the most important things that you just want to get it right. Based on my own experiences of talking to more than 5 financial firms, here are things that I suggest you to pay attention to.

Understanding money managers’ strategy and philosophy
Before you give your money to somebody else, make sure you understand what they are doing with it. This is just to be responsible to your own money. You should understand their investing philosophy: value oriented vs growth, conservative vs aggressive, bottom-up through stock selections vs top-down via asset allocation. Most likely you will hear all the “good things” that they will do, employing the best of both worlds. But make sure you force them to take one side. It’s totally contradictory to take both sides. Certainly, there are exceptional time that you may switch your strategy to the opposite way, but there is always a central theme in their strategy. You just can’t be both value and growth investors, nor can you do bottom-up and top-down at the same time. Either bottom-up, and then top-down, or top-down first and then bottom-up. You have to weigh in one strategy higher than the opposite. Anyone trying to tell you “the best of both worlds” is either lying or repeating like a parrot without understanding the investment world. Make sure that their investing philosophy aligns with your goals.
How and what money managers trade
The other important things to ask is how they do trades. Some firms actively trade a lot. The portfolio turnout can be very high. Ask how much of the portfolio is turned over every year. Usually you don’t want a lot of churning, unless the firm can prove itself as a good trader. Some firms are hedge funds or hedge funds-like. They will use put/call options, short positions, and/or margin, possibly gaining more leverage beyond your 1X cash buying power. You must understand what kind of trades they may enter.
How money managers allocate assets
Most firms have some goals in mind for each sector or each class of asset such as bonds and foreign stocks. You should inquire them in details, so that their asset allocation will match with your overall picture. Some firms don’t use bonds at all or just keep a tiny balance in bonds, since their clients most likely will have their own bond portfolio. Some firms are more like total money management solution. They may have a significant portion of money in bonds. Understand how they allocate their assets can help you re-align other assets properly. Preferably, you want some diversification (well, unless you’re so sure of some sectors that you really want or you really don’t want).
Fee structure of the money managers/firms
Almost all firms charge by the percentage of your account balance, as part of their compensation. At 1% fee, if you have $250K, then they will take out $2500 every year for management fee. The fee often ranges from 1% to 2.5% as a percentage of your account asset, plus any trade transaction fees that may be charged to you. Money managers using mutual funds should be charging less than the ones using stocks directly. Using options or even (commodity/forex) futures will probably cost you more. And foreign markets cost more too. But if the account has sufficient percentage of bonds, their fees should be lower because bonds are less volatile and require much less attention. The more sophisticated the strategy is, the higher the fee, but unfortunately NOT necessarily the performance. Some firms lump the trading commissions as part of their percentile fee, but some firms don’t. To give you a point of reference, my current money manager for my stock account charges me 1% + all transaction fees. Do remember that these transaction fees are not like $5 per trade at Izone or $7 at FirsTrade or Scottrade. Their transaction fees are usually at least $12 and can even be as high as $50 per transaction. Some money managers will even charge for their out-performance when it happens. They may charge additional beyond the basic charges when your portfolio return is better than 8% to 12% (it all depends).
How are the new cash/account treated
Paying such high fee, you would wish that your account has individual attention. But often, the amount of attention is probably less than you expect. The best to hope for is that your new account or any new cash added are only employed at the opportune time. However, many firms operate more like a mutual fund, where most of the money from every different investor goes into the same pool of investment, and you simply get a share of the same thing. In that case, it is important to find out whether you’re simply buying another “mutual fund”. When all of you new cash is used to buy into their allocation immediately, it is not very good for you (but much easier for the firm). Since market goes up and down, all of your cash goes into the market in a snapshot, and you don’t get any diversification by sampling the stock market at different points. You would hope that the firm at least attempt to find a more optimal point to put your cash into use for different segments of market. Obviously, the firm will not change their way of doing things. But it is important for you to find this out. If they are not doing any time diversification, at least you can try to do that by infusing new cash into your account at different time points. Or have an agreement with the firm that you want to phase in the minimum amount of cash gradually instead of giving them everything in one snapshot.
Performance and References
This is probably the most basic thing that you should get. You should always get a verifiable performance record if possible. If not, at least you should get some references or investigate the reputation and background of the company. Get the performance number through up and down time in stock market. That can give you some better ideas about how well the money manager or the company manages the money.

Here are some articles that I found on the internet. I suggest to read all of them, even though a large part of them may be repetitive. If you make this far to the end of my post, I assume that you are serious about letting others to manage money for you. Spending another half an hour to read through these is nothing, compared to the amount of the money that you will spend for fee or you may potentially lose.

1. Basic Questions to ask your wealth manager from Rediff
2. Questions to Ask a Financial Advisor from FinancialSense. Most financial advisors in the business do not know how to deal with a secular bear market.
3. Questions You Should Ask About Your Investments, from SEC. This is a standard list that you should have in mind.

This week’s Digg is at Free Money Finance which is one of the best personal finance sites. The thing that I like the best about his site is that he provides invaluable career advice that you should certainly check them out. Your career is probably one of the most important assets that you have. I’m digging his article “Ask for More Money When You Get a Job Offer” this week.

Other articles that I think will be useful to many of you are:

1. Nine Steps to a Perfect Career Fit
2. Get a Degree and Manage Your Career
3. Your Career is Your Most Important Asset

1991: Advised my dad to buy INTC (Intel). My dad bought Macy’s department store instead, which went into Chapter 11 bankrupcy later. From about $1 to $69 in year 2000, that’s about 69X return.
1995: I was done with my personal home page. Certainly saw the big potential of internet. Being too early in the wave, I also dismissed the internet bubble too early in 1998 when I first had a little money. I never bought into the internet hypes. Throughout the internet/high-tech boom years, I was mostly in the school, and /or without any money. The only thing that I could do is watch from the sideline.
1996: CSCO (Cisco). Slept only 1 hour the night before interview, and didn’t do well for the interview. I bought CSCO, and put a GTC order right after purchase. The GTC order got executed without me knowing it. Too busy in the school at that time. From $6 to $77 in 2000, that’s almost 13X return.
1997: QCOM (Qualcomm). Did the stupid thing again of not sleeping enough before the interview. Can’t believe I screwed up in the interview again. (I wanted to buy QCOM in 1998 and kept waiting for it to fall a little bit, until an announcement of China adopting CDMA standard, which drove up the stock by 10% in one day on 10/13/1998. I gave up buying QCOM from that point, which rose from 2.52 to 87.10 on 1/3/2000, a 34.52X from that point). Now it’s at $38.
1998: Tried BRCM (Broadcom). Too hot to even get an interview, and too scared to buy at a triple price on the IPO day. From $9 to $275 in year 2000, that’s almost 31X return.
1999: Got a great offer from MRVL (Marvell) at the pre-IPO stage. Because of lack of public information about the company, I decided against leaving the comfort zone of working in a big company, despite that I saw a promising and a strong company at Marvell. Now MRVL is at $19, which I could have got at less than $1 pre-IPO. At least 20X return.
2000: MyTwoMillionsAt28 dot com (at company XYZ).
2002: Almost landed a job at NVDA (Nvidia). It would be a great opportunity to get the stock options priced at super-low price at $4, and now it’s at $30. Almost 8X return.
2004: AMD (Advanced Micro Devices) could not give me a competitive offer to me due to my highly in-the-money stock options. It was at about $11. AMD stock price almost quadrupled after that, and now it’s at $26.

I’m sure that most people working in the high-tech industry came very close to strike riches if not already. From 1990 to 2000, it had been terrific years for high-tech. If you were able to catch (and cash out) the ride, you would have done great. Sometimes, being at the right place at the right time is all it matters. In a bull market, you usually don’t need to be smart or selective about your choice to come close to riches. But more importantly I recognized that it was not because I was smarter, but because I was at the right place at the right time. Recognizing the macro-economic trend and riding on the prevailing secular bull market is usually more important than individual stock/real estate selection (which you can usually employ sector ETF/mutual fund without selecting individual stocks).

P.S. I certainly missed the real estate boom totally. The real estate was already beyond the previous peak on the inflation adjusted in 2000/2001, and I was afraid to buy into the peak. It turned out that it is the most gigantic boom/bubble in the human history in terms of dollar.

And hindsight is always 20/20, .

I heard about many things on refinancing to get out of the coming ARM reset, and I talked about saving these reset by re-refinancing myself too. But such a successful refinancing depends heavily on the amount of home equity you built up (or the valuation of your home), and is only for people who did not abuse their home equity. If you are an over-leveraged real estate investor, and you plan to refinance your ways out, I think the doors will probably be shut for you. Here are some of the ways that you cannot refi without coming up with extra cash. The following examples use interest-only loan for illustration purpose. Qualitatively things will the about the same if you refi using the same type of loan. But if you go from 30-year fixed to interest-only, or interest-only to negative ARM, your cashflow situation (just for now) will probably look better.

Example #1 (increase in interest rate, with the same payment or affordability):
You need to come up with $49400 to settle the refinanced loan, plus any loan costs of about 0.5% of the property value.

	Now	Refi Term
House appraised value	700000.00	648000.00
DownPay/Home equity	5.00%	5.00%
	35000.00	32400.00
1st Mortgage interest	6.00%	6.50%
Interest Only 80% loan	2800.00	2808.00
home equity rate	8.00%	8.50%
Home equity interest-only loan 15%	700.00	688.50
Total monthly payment	3500.00	3496.50
Loan balance	665000	615600

Example #2 (No change in interest rate, but with a market down by 5%):
You need to come up with $33250 to settle the refinanced loan, plus any loan costs of about 0.5% of the property value.

	Now	Refi Term
House appraised value	700000.00	665000.00
DownPay/Home equity	5.00%	5.00%
	35000.00	33250.00
1st Mortgage interest	6.00%	6.00%
Interest Only 80% loan	2800.00	2660.00
home equity rate	8.00%	8.00%
Home equity interest-only loan 15%	700.00	665.00
Total monthly payment	3500.00	3325.00
Loan balance	665000	631750

Example #3 (Tightening in loan underwriting standard, and with a market down by 5%):
You need to come up with $68250 to settle the refinanced loan, plus any loan costs of about 0.5% of the property value.

	Now	Refi Term
House appraised value	700000.00	665000.00
DownPay/Home equity	0.00%	5.00%
	0.00	33250.00
1st Mortgage interest	6.00%	6.00%
Interest Only 80% loan	2800.00	2660.00
home equity rate	8.00%	8.00%
Home equity interest-only loan 15%	933.33	886.67
Total monthly payment	3733.33	3546.67
Loan balance	700000	631750

The above scenario assumes that you bought the property at the height. You can adjust the amount of the home equity/loan balance/home valuation in the Excel spreadsheet here. But the story is the same. If the home values go down, lending standard tightens, and/or interest rate increase, you will be looking at putting up extra cash for refi and/or an increase in payment. Certainly, if you bought your home earlier, the situation is different. But the only reason that it is different is because of the home valuation, not because of the rent collected can be much bigger.

If you are a real estate investor that holds multiple investment properties, the power of the leveraging will work both ways. You will need to multiply the amount of cash needed by the number of properties that you have. When housing market goes up, everything is great. When housing market goes flat or down, the leveraged players are the first one to go. Now instead of the cashflow generating machines, it will become a giant negative cashflow sucker. Until the point that you start to default on your very first loan, the refinancing game for the rest of your loans & properties will probably be over for you. The reason is that all the future refinancing terms will be dramatically worse for you after that.

I think the housing “correction” will have years to run. So any real estate investors in the bubble zone better start selling now, or hold onto any cash that you have. The most straightforward way to get out of a leveraged mess is to de-leverage (by selling).

Unfortunately, more likely there will be some appraisers and mortgage brokers going to jail along with real estate investors at the end. You can find tons of actual fraud reported here at the Mortgage Fraud blog. Yeah, people do go to jail for cheating on their loans.

I just received an investment package for shorting against these mortgages bonds from EuroPacific. Minimum investment is $100K, and minimum networth will probably be $1.5 million (I wish I qualify here). From their studies, here are some eye-popping numbers:
Percentage of option ARM and interest-only originated loans in California:
2002: 2%
2003: 18%
2004: 47%, 10.6% of people has 0% or negative equity in their home.
2005: 61%, 29% of people has 0% or negative equity in their home.
2006: ?