Surprising Resolution Of Mortgage Paper Fraud Coming

There is a serious mortgage paper fraud bubbling to the surface. I was aware of this several years ago, but I was not aware of the magnitude. It is so serious that I think it can easily turn the whole world up side down (for the second time, I guess).

Some background first. The US bankers and Wallstreet or more properly called “fraudsters” first selling all the worthless “mortgage-back” securities back by phantom 100% financing loans from 2005 to 2007, cheating the entire world out of savings. They turned the world up side down with the financial crisis, and then had Paulson from Goldman Sachs being the US treasurer at that time, saving their ass with taxpayers’ money, transforming or rather downloaded all the worthless mortgage paper onto Fannie Mae, Freddie Mac, and AIG. Of course, everyone thought that was a great mission accomplished.

Now, when they try to foreclose homes, but lawyers demand to see the promissory notes, they find out, “Damn, where is that piece of crap?” Imagining all the homes that cannot be foreclosed on, due to missing documentations for the promissory notes? All the mortgage-back securities now will be truly back by NOTHING!

Here is what I will venture to guess the potential outcomes.
1. The only way to foreclose these homes will be through non-judicial foreclosures (including California, the home fraud center). Rather than getting nothing for the mortgage paper, it’s far better than getting something for it. Once the avalanche starts rolling, every bank will start scrambling to sell the homes out of the flood gate. Home prices will fall by another 20% in the coming 2/3 years. Or at the minimum, the shadow inventory of the homes on bank’s balance sheet will dramatically rise.

2. If this is not resolved through Congress passing a new law, back-patching the shoddy works by bankers, and the news start to spread around the whole world, US dollar will drop to a new dramatic low. Imagine another 3 trillions loss (out of 11 trillion) on Fannie Mae/Freddie Mac backed debts, all USA government owned? By the way, if this event unfolds, stock markets will panic first, but later will reverse to break 52 weeks high. Bonds will plummet for sure. Real estate will go into extended nuclear winter.

3. New laws get passed through Congress to save the bankers’ ass. Congress initially side with home squatters in the name of protecting voters, until all the law-abiding citizens take the street, demanding fairness. Then Congress realizes that it’s too late to stop the revolution by the majority of the law-abiding citizens, turning to lawless resolutions everywhere.

Just some crazy ideas. But certainly less insane than what has been going on in US real estate markets. And all of the rotten apples (Wallstreet bankers, home speculators, and all the mortgage “consultants”) are still in there unbelievably.

Going From Thirties To Fourties

People say that one may have a mid-life crisis around 40s. That’s definitely true.

When I started blogging, I have always thought that I’m “young” and energetic. But a reader while in college addressed me as “Sir” as if I’m so much older. Come on, about 10 years ago, I was still in grad school. I didn’t feel that I have grown out of the school years at that time.

And just a couple of days, I asked my dad NOT to come to airport to pick me up for my upcoming trip to go back home. I needed to remind my dad that I’m almost 40, and he is almost 70, and I’m not a kid anymore. Time flew by so quickly.

I still remember when my dad was 40. He appeared to me as “old”, since I was a little kid. I wonder how my own kids look at me now. I even have white hairs that can’t be hidden anymore.

The same story goes for personal finance. I really thought that I was young and capable of taking bigger risk. After 2008 stock market debacle, suddenly I realized that I’m not as young as I thought. What I have lost from peak to bottom, I could have never recovered that by decades of saving until retirement. In reality, if I assume that one could accumulate savings from the age of 28 to 58 for thirty years, I have already used up about one third of the time. Doesn’t that sound a little bit scary?

That’s why it’s always better to start saving as soon as one can. If you save for consecutive 30 years, you multiply and compound your savings for 30 years. But saving for 40 years will be at least better by 33%=40/30-1. Now, if you only save for 20 years, you will be worse off by 50%=30/20-1. But if you could only manage to save for 10 years, well, I sincerely wish that God will bring you some good fortune. Or alternatively, you can always go out and buy a personal finance book, 99% of which is always overly optimistic. These authors always play games with “stock market return” percentage from 5% to 12%, and then tell you that by math of compounding (if stock markets consistently returns 10+%), you will just become magically rich and retire.

Is that really so? Maybe it works for this generation of baby boomers, since they’ve got all the entitlement programs supported by all the younger generations which are bigger in numbers. When a population graph looks like a pyramid, with few people retiring, and many youth working, it always work by the Ponzi scheme principle. But most of other generation won’t be so lucky, especially we are already over-burdened by trillions of fiscal deficit.

Am I too pessimistic? No, I’m advising you to take actions NOW! When you don’t let time (and money) work for you, then time will just go against you. And the only way to break the spell is to take actions now. Whether you’re on a job, or out of jobs, take actions for yourselves. Don’t just sit there, and lament what has transpired. If you don’t do something, your situation is not going to change for you. Plan for the worst, but try your best and hope for the better. Even if nothing happens, at the end of everyday, if you have tried your best in everything, whether it’s saving money, doing your job, or finding your next job, you can always tell yourself and God, that you’ve got a grade of A+ today for the 105% effort that you’ve put in. And therefore, there is absolutely no regret. That is how can a great man and a great task (saving for retirement) get accomplished, one day at a time, even when there may be a long stretch of apparently zero progress.

That was how I learned my first hard lesson in money.

First Fall Is Not As Ugly Yet

With Monday drop in the stock markets, sentiments have temporarily turned. I think before the first week of July, stocks may be still in the “levitation” stage, meaning that a big drop won’t come yet. Plus that today and tomorrow, Fed will come out and swing again. We are sure to see some more volatility. Unfortunately, the only thing htat I’m more certain is that it may be a short-term downside on gold. Fed is losing its credibility. Whatever Ben says may backfire now, posing risks to further bond yield rise, or US dollar fall. If US dollar falls (which is less likely in the short term), then we can party on.

I have previously stated on my blog that I believed a decline will come by July/August timeframe (please post the link if you find it sometime back in April/May. I’m really too busy to blog these days). Currently, I’m still not sure if the current decline will turn out to be the retest of the low. It is still possible for stock markets to decline moderately towards late July, and rally back up in August to establish a lower high on the chart. In any case, it seems to be fairly certain that the high of 2009 AND 2010 AND 2011 is behind us. There may be a very brief year-end rally in December timeframe, but I seriously doubt that brief rally can exceed the last high. And the financial crisis will probably replay with a even bigger magnitude either second half of this year, or in 2010. In any case, I’m also certain that Bernanke won’t have his current job in 2011.

It is my opinion that one should divest everything correlated to the general economy and go to cash.

For the aggressive traders, they can look for establishing short positions.

Considering The Impossibility

Everything is possible now with the unraveling speed of Wallstreet 700 trillion derivatives. Which of the following scenario may come true? Maybe all of them.

1. Dow at 3500 in 2011.
2. Gold at 5000 in 2016.
3. S&P 500 bottoms at 400.
4. The economic depression lasts more than 20 years until 2032/2033. This is not coming from me, but from the best economist that I know.
5. All major banks nationalized at 80% of more, with stocks trading at penny levels by the end of 2009, continuing to extract hundred of billions every quarter from taxpayers to cover their derivative losses. Why is there no one outraged by benefits going to all the counter parties of the banks? The losses of the banks are the gains for the counter parties of the banks, which are being paid by all the US taxpayers, and eventually by the entire world through monetization and inflation.

My “own crystal ball is showing” me that the stock markets will literally plummet another 50% to 60% in the second half of 2009, deflating everything until 2011, after which inflation gradually accelerates towards 2016, and wipes out all the cash holders. I predict in less than 15 years, there will be a hungry and unemployed mob rioting in the streets of Washington DC.

The other day, I donated more to Ron Paul’s calling on fighting against mis-using of taxpayers’ money. American Republic is becoming a farce of preferential money distribution. Although intellectually I believe that US will not come out of this unstoppable economic mess until wrecking itself, emotionally I must “do my part” of trying to turn things around. Who else will turn USA around, if everyone of us don’t stand up and fight together? There will be no one saving this country from even dire economic except us.

I understand that it sounds almost stupid to consider the impossibility of my little donation and my lonely voice will make any difference to the fate of this nation. But when I ask “who else” to myself, I think I might as well begin with myself, joining hands with Ron Paul’s campaign. I’m literally a “hopeless romantics”. But who says (my) love (for the nation) needs to be logical?

Global Economy In A Nutshell

From about 1980 to 2000, global economy (especially US) enjoyed unprecendented steady growth without the inflationary pain that often comes with it. There were three primary trends:
1. Technology advancement has lowered real costs associated with production of goods and services.
2. International trades and globalization faciliated capitalism to find the lowest cost structure through a combination of variables in global wage arbitrage, tax, and transportation costs.
3. Just-in-time inventory systems through information technologies have reduced the inventory needs to the lowest level required.
4. Inflationary effects from monetary and fiscal policy are negligible when it is averaged on a global economy that has increasing number of low wage work forces without much end-user demands for basic commodities in third world countries.

Everything was all good, but all good things have an end. Going forward, I believe the following factors and trends will increasingly shape the global economic landscapes:
1. Technology advancement is hard-pressed to lower most of the real costs for goods and services in a significant way (let’s say 10+% improvement on an inflation-adjusted, annualized basis, and weighted by its monetary contribution). In another words, the fruits left are the low-hanging fruits.
2. International trades and globalization only work in a low transportation cost environment. High energy prices may reverse the gear on globalization into de-globalization. High inflation will also cause higher trade barriers for crucial commodities.
3. Just-in-time inventory is causing and and will continue to cause extremely high price volatility for prices of commodities and goods. From a mathematical point of view, a feedback system with less buferring capabilities is usually less stable than the one with more buffers. The buffers act as a low-pass smoothing system to smooth out the magnitude of changes from the input to the output. Using laymen’s terms, a low inventory system speeds up the the price changes from the input to the output. Furthermore, it excerbates the volatility in capitalism which hinges on the real-time dynamic balances between supplies and demands.
4. Rising living standards in third world countries put the capitalism to test. Yes, the textbook is correct in stating that increase in money circulation will result in higher inflation. The statement applies in a closed economic system. US domestic inflation is continued to be held down via global trades for now temporarily. However, increase in US money supplies have been “sterilized” by foreign governments via printing of their own currency and buying up of US debts. The end result is that the labor workforce of Asian and Middle-Eastern countries are not enjoying the fruits of their hard work through an appreciated currency to bring a higher living standard. Rather, the labor are suffering the majority of the inflationary effects from the US, while the businessman pockets loads of money primarily not through a more efficient company, but through a wage arbitrage mechanism due to the currency exchange rates held down by foreign governments.
5. An aging demographics is going to exert its inflationary effects on mature economies. Less active labor and more demands for services from elders is the formula to drive wage inflation, if all other factors hold the same.

Whether my observation and interpretation on global economy is correct or not, it is always important to understand the past on how we came to where we are, in order to project the future and find where we may be going. What was achieved from 1980 to 2000 may not be achievable anymore. It’s easy to say that human innovation always triumphs. But unbounded optimism is best to check against with realities once in awhile.

My New Budget For 2008

While doing this new budget, I was extremely impressed by the tools provided by the credit card companies. They have made the budgeting process so much easier that you no longer need to spend hours and hours trying to figure out where your money has gone. All of them provide spending by categories and dates, so that you can easily figure out your own spending style. Although the tools will never be perfect in categorizing every bill, at least it’s a very good start.






This is not the true value that I pay, but only serves as what I should be paying in terms of interest cost due to carrying a mortgage, or the equivalent rent that I should be paying.

Homeowner due


Includes the insurance for the condo.

Electricity & Gas






Local Phone


Cell Phone


There has been some increase due to usage, but here is how I get it so low.

Long Distance Phone


Mostly it’s international calling cards.



Most vanilla plan because I can’t get clear TV signals.

Medical Insurance


Covered thru my employer.

Car Insurance


Only pay about $900 a year for two old cars, liability only, plus full coverage on 1 new car.



My round trip work commute is 24 miles. My car has about 20 miles/gallon.

Car Maintenance


Oil changes + prorate for changing brake + 30K/60K miles service.



Annual of $4600, mainly for flying (internationally) back home to visit parents.

Food + diapers + baby milk powder


Does not include dining out.

Dining out


Never realize that it’s quite a lot of money spent here.

Toys/Books for children


Preschool/other educational expenses


Currently zero, but expect hefty increases starting next year.

Wife’s allowance


Wife’s happiness is of the most importance.

Cash Usage


God knows where I spent these dollars.



Increase due to a more realistic assessment of my contribution.



About $100 extra padding, while the other $200 do get spent on all kinds of things.

Federal Tax


Tax can increase very fast with additional income or without 401k/IRA contribution.

State tax


City tax


Social security tax


Medicare tax


Property tax




Annual limit is $15500.

Spousal IRA


I’m not allowed to contribute to this due to my high tax bracket.



Employee stock purchase plan, maximum amount of $18000.

Here are some reflections on the increase of my expenses from 2 years ago:
My gasoline cost increased from $160 to $260, mostly to due crude oil price increase and longer commute distance.

The other major increase in the total of food+dining is from dining out, even though the most (if not all) of the dining bill is less than $35 per family. This category has gone up by almost 50%. The main reason is that my kid is no longer 0 to 1.5 year old, and I can finally dine out.

My cell phone usage has gone up too from $7 monthly to about $9, due to the increase in my other side activities besides the blog. But the absolute amount is tiny in comparison to any other items. And yes, I’m still using T-mobile prepaid.

And I have also decided to simply budget for my charity spending, instead of deluding myself. It has been pretty consistent for past 5 years, and the amount of money going towards charity purpose will only go up instead of down. I have under-budgeted the charity amount somewhat, just to give myself a little financial breathing room. I think putting it at $290 monthly should be a good compromise.

My “vacation” expenses have gone up a lot because of the cost increase in international travels going back home, and also now I’m forced to take these travels ONLY during school recess.

In case you wonder, I also zero out Spousal IRA item since that is simply a “theoretical” contribution instead of a real one. My tax brackets have disallowed this contribution almost every year.

I also up $200 on miscellaneous category, which appears to be the right amount from my past 12 months of spending.

Looking forward, I expect that I will be spending more and more on children on educational purposes as they grow up.

From above, my total expenses (in white) are $5238, and my total taxes (in red) are $1661, and the savings (in green) are $2792. Assuming a household income of about $110K, or a monthly wage of $9167, my cashflow after deducting all the above items is negative $524, which needs to be deducted from savings. Please note that the above taxes are just the taxes that one might be paying at such income level, but I actually pay A LOT more (3X or more). This is mainly due to a very progressive tax system that extract a lot more taxes from any additional income beyond this level. My marginal bracket is at about 40%, instead of 20% from the above. The only problem is that it just doesn’t take much more income to quickly go to 40% marginal bracket.

The bottomline is that my net saving has dropped to $30400 from the previous $45000, after I account for the 15% discount in share purchases of my company ESPP plan. Some of the drop is due to the differences in what I’m accounting for budget, but nevertheless, the drop is significant enough to be observable from bank account balances. Unfortunately, I expect my saving levels to continue to dwindle, due to the increase in the child expenses going forward.

What’s the lesson here? I’m not becoming much less frugal, but my saving drops. Inflation accounts partially for the drop, but the main reason is as stages in life progress, your saving (if it is still positive) will be dropping to its LOWEST when your children start going to college. I’ve written an entire post (boring, but truth that you don’t want to hear) on this point to advise anyone out there to start SAVING NOW. The best time to accumulate your savings is before having any kids, especially before getting married (and after you just started working). The next best time to accumulate your savings is when your kids finish college, and before you retire. The rest of the time, one should consider oneself lucky to scrap away something left after all expenses are paid. If you have any doubts about my drawn conclusion, simply ask your parents.

Bear Stearns BSC

Well, actually it’s probably going to be less than $2, since JPM will probably fall on Monday.

BSC is the 5th largest brokerage company in America, brought down by the housing bubble created by Greenspan & company. These are the financial innovations on Wallstreet, creating bonus and money out of toxic loans.

Gold and silver both broke new highs. Market on Monday is most likely going to be terrible. I think we may be heading towards another 20% hair cut in the overall stock market.

Your and my life are going to be seriously affected by the current credit crunch no matter what, whether it’s heightened inflation or decreased economic opportunities (layoff). The entire credit pyramid when it crumbles is just not a pretty sight. It’s called deflation. Or more correctly, it’s called asset deflation.

What I expect going forward in the coming decade is
asset deflation and
commodity inflation.

This is the most lethal combination to wealth destruction. From 1980 to 2000, it was the best combination for wealth generation:
asset inflation and
commodity deflation

Those lucky baby boomers who rode the entire up wave in stock markets were fortunate to reach multi-millionaire status. But going forward, I believe few people will be able to preserve their existing purchasing power. Collectively as a whole, the sum of purchasing power for all people has to be reduced thru the process of asset deflation and commodity inflation.

Better preserve your buying power before it’s too late. By the way, I think there is at most another 10% upside in gold. There should be a correction. If you jump in, don’t forget to jump out.

Time To Refinance Or Get A Loan

Actually it’s a little too late, but better late than never.

I will be doing a refinance. My previous loan is a zero-cost loan, meaning that it’s a no-point no-fee nothing-out-of-my-pocket and nothing-added-to-my-loan-balance loan. I paid a slightly higher interest rate, but I think it was worth it.

Anybody who wants to refinance or get a loan along with me, just send me an email at (replace # by @). I think I can collectively bargain a cashback of about $50 to $100 for everyone with the mortgage brokers.

If you are interested, please MAKE SURE you put the subject in your email as “home loan for XXX state”, where xxx is the state that you live in. In the email, please put your first name, a phone number, the loan amount, and the loan terms that you are interested in. If your credit is not that good, please state so. If you know your loan-to-value (LTV) ratio is more than 70%, please state your LTV also. Obviously, I will only give this information to one single mortgage broker/company, and not anyone else. Your privacy will be guarded to my best effort. For the state of California, I already have several mortgage companies in mind. But I can’t promise anything yet for people outside of California.

I think stock markets may go for another dive in March, which means that the mortgage interest rates will be low again. You should be in time to catch and lock in that rate.


Frugal at My 1st Million At 33 .com

Networth Review: My Year To Date Performance

Usually I do a monthly review on my networth, but I have been too busy to do this (and anything else). So I will just keep this short as a quick update.

So what has happened to my net worth (from Feb 14 closing to Dec 31st 2007 closing prices)? Bad news first.

First, let me say that my home value has gone down significantly (10% to 20%). That has not been reflected in my net worth page. When I get some time, I will start to mark it to market, and smooth out the losses in several chunks.

Now the really bad news, even worse than my home value going down is that my company options have pretty much gone into nothing. I’ve suffered close to 90+% in this category. Year-to-date (since Jan 1st) the value of my company holdings have gone down by 59.4%.

My net worth has gone down by 7.43% (without counting the dropping home value) mainly because of the huge loss in my company stock.

My own investment however has fared much better. My total stock portfolio has gone down by 3.44% (about 30% of which is contributed by my money manager), while including cash, my cash+stock portfolio has gone down by 1.86%. This compared to a gain of 3.6% in HUI index, 10.9% loss in OIH, 8.4% loss in XLE, 7.6% loss in SPY, 14.2% loss in QQQQ. I guess a loss of 3.44% is probably satisfactory, given that I have incurred some small trading losses, plus some hefty losses in junior mining stocks. Certainly, my cash+stock portfolio compared to the overall market is doing pretty okay, since my loss is less than 2%.

Unfortunately, I simply have not taken enough hedges against my company and real estate holdings. Those positions are so out-sized that I’m usually afraid of taking a big bet. My inaction has certainly caused my overall net worth to suffer tremendously.

In any case, what’s gone is gone. I’m pretty sure that given enough time, I can make those money back. It’s just going to cost me 10 to 15 extra years of my working life, yak!

I was going to do a year-end review for 2007, but it’s probably too late to be meaningful. I know my portfolio was up about 16%, but my net worth was pretty much flat, due to a huge loss of 50+% in my company stock options. I’ve made up quite a bit of those losses through investment gain and savings for the entire year. However, if I count from the peak, I’ve only made up some 40% of the losses in company stock options.

Actually, come to think of it, I probably should start account for the capital gain taxes that I need to pay on my investment gain. I haven’t counted those, but the amount of capital gain tax that will be due is getting so big that it’s actually going to affect my net worth. I would never imagine that this is going to be an issue when I started logging my net worth on this blog (only 2 years ago). For now, I’m just going to leave it at that. I just have too much that I need to take care and I don’t have time yet to account for everything in the last details.

Out Of Closed End Muni Funds For Now

I have discussed before that for my asset allocation, I had chosen to have muni bonds in taxable accounts instead of taxable bonds in tax-deferred accounts. In fact, I purchased some NXZ at the beginning of the year. I got out of them last Tuesday, after the big panic. Although I managed a small profit, the selling price was below Friday’s close. I wasn’t too happy about the move at first, but my prudence may still be rewarded.

The motivation was of course the imminent downgrade of the bond insures Ambac and MBIA, which has been all over the news. To be fair, the muni insurance business is profitable, serves a useful purpose and will never be allowed to fold. However, some has suggested a figure of 200 billion! is needed to bail out the bond insurers. That may be too steep a price even for the billionaires who are circling around the (soon to be) carcasses. In all likelihood the 200 billion figure stems from the write-downs from CDS’s (Bill Gross doesn’t appear to be that far off), and you can bet that the bond insurers are clutching to their muni business like a lifeline. Barclays is now saying that if the bond insurers’ rating are cut too deeply, banks faces additional 143 billion in write-downs. A hundred billion here, a hundred billion there, and pretty soon, we’re talking real money!

Judging by the price action of those closed end funds, muni investors are nonplussed about all this ruckus. However, a little prudence may not be a bad thing. It’s not unreasonable to assume that while Ambac and MBIA are drinking from the CDS cool-aid, some of that good fun got spilled over to the muni insurance side, and the default risks got under priced in some issures. At the least one would expect the balance sheets of municipalities hard hit by the housing crisis not look as sound. So while as the muni insurance business as a whole will never go away, it’s not clear that all the muni bonds will keep their existing ratings in a re-shuffle.

I could pour over the latest quarterly reports of those muni funds to see what may be affected, but given the size of my investment that hardly worth the effort. I’ll keep the cash and jump back in after this brouhaha is over.