Tuesday, March 27, 2012

Home Affordable Refinance Program (HARP) - Phase 2

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

An extended period of low interest rates encourages refinance activity. This happened on a massive scale with home mortgages about five years ago. This kind of mortgage turnover can stimulate economic activity. This remains a goal of every new federal program. What is the problem? Lenders have limited incentives. Many homeowners have trouble qualifying for a refinance. And federal programs, including the original Home Affordable Refinance Program (HARP), have fallen short of objectives.

The most recent federal program, phase two of HARP (HARP 2.0), is supposed to remove some of the traditional “roadblocks” and improve on its predecessors. Here is a basic list of requirements:

• Your loan must have been sold to Fannie Mae or Freddie Mac prior to June 1, 2009 (click to determine if your loan is owned by either Fannie or Freddie).

• Your loan must be current (no missed payments in the last 6 months and no more than one missed payment in the last 12 months).

• This must be your first HARP refinance.

• You must owe more than 80% of your home value. There is no maximum loan-to-value. However, your lender may have different loan-to-value requirements (see “overlays” below).

• Participating lenders can apply their own specific requirements (“overlays”). This is where the “catch” may be. You may find that your lender either doesn’t participate in the program or limits participation by applying additional requirements (“overlays”).

The program will not apply to every “underwater” borrower, but there is a little more incentive for the “big guys” (Chase, Wells Fargo, Bank of America, etc.) this time around. Hopefully this will at least help a few of you.

If you think this program may apply to you, contact your servicing lender. If you are able to qualify, you will want to get started ASAP. Pease review this Q & A before contacting your lender.

Friday, March 16, 2012

Out of the Blocks

Jim Parker,
Vice President
DFA Australia Limited

March 2012

“And you thought 2011 was tough?” So went the headlines in December as media and market pundits, reflecting on a miserable year, saw no respite for investors in 2012. But markets have a funny way of confounding expectations.

To be sure, the reasons to be anxious were piling high as the year turned, with European politicians dithering over how to tackle a tottering mountain of sovereign debt, poli¬cymakers in the US running short of options, and emerging markets not providing the cushion that many investors had hoped for.

The general view, as expressed through the media, was that there would be more muddling through in early 2012. “Buckle up!” warned the respected Barron’s magazine. “For investors frightened by the stock market’s volatility in the past six months and tired of worrying about places in Europe once given little thought, 2012 promises scant comfort—at least in the first half.”1

As an investor, if you had taken that advice, you might be ruing it now, as global equity markets—as measured by the MSCI World Index—have registered their best start to a calendar year in twenty-one years. The index was up by just over 10% in US dollar terms as of the end of February. You have to go all the way back to 1991 to find a better start.

Added to that is that much of the leadership for the turn-around is coming from the US, an economy that many observers just two years ago were writing off in favor of the emerging powerhouse economies in Asia. The US bench¬mark S&P 500 was up by 9.0% at the end of February. This is also its best start since 1991 and returns the index to the levels of June 2008, before the Lehman collapse.

The US market’s strong start followed a standout 2011 in which it was one of the best-performing markets in the world. And that included most of the emerging markets.

Even Europe, the epicenter of concerns for much of the past year, has exploded out of the blocks in 2012. The Euro Stoxx 50 was up by nearly 12% over the first two months of the year, with the German market rising by close to 20% in US dollar terms.

The renewed buoyancy extended to Asia, where the MSCI Asia Pacific Index has registered ten consecutive weeks of gains, its longest uninterrupted winning streak since 1988, and powered by strength in energy stocks. Australian stocks have firmed as well, to be up 12.5% year to date in US dollar terms—although in local currency terms, the gain has been less stellar at just over 7%.Why the change in mood? There are several catalysts for the turnaround in markets so far in 2012.

First, by the end of last year, market participants were dis¬counting a lot of bad news, including a couple catastrophic scenarios. Fears of mass defaults in Europe and a possible breakup of the euro were seen as entirely possible.

While Europe can hardly be described as being out of the woods yet, the agreement by creditors on a new round of official funding for Greece has eased nerves, as has the European Central Bank’s provision of another half-trillion euros in cheap funding to financial institutions.

Second, there have been signs of a turnaround in the US economy, at least compared to the view the market was taking a few months ago. At that time, another recession was seen to be in the cards. Since then, data has shown an improvement in the labor market, a rise in manufacturing orders, and a climb in consumer confidence.

Third, central banks are pumping out massive amounts of cheap cash—essentially printing money—to provide liquid¬ity to the financial system and to support the recovery. As well as the ECB’s latest cash injection, Japan and Britain have recently extended their so-called “quantitative easing” programs, while China has cut the reserve requirements for its banks.

Of course, just as it was wrong to extrapolate the pessi-mism of last year into 2012, it would be foolish to forecast that the rest of this year will resemble the first two months in tone. No one knows how markets will perform going forward, because that requires an ability to forecast news. You can always guess, of course, but we tend to think that’s not a sustainable investment strategy.

The point of this is to highlight the virtues of discipline and the tendency of markets to absorb news very, very quickly and to look forward to the next thing. Unless you know what the next thing will be, you are wise to stay in your seat.

1. “Buckle Up!” Barron’s, December 19, 2011.

Past performance is no guarantee of future results. Indices are not available for direct investment and do not reflect the expenses associated with the management of an actual portfolio.
Diversification neither assures a profit nor guarantees against loss in a declining market.
Dimensional Fund Advisors LP (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is pro¬vided for informational purposes, and it is not to b construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.
©2012 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Friday, March 9, 2012

Who Has the Midas Touch?

Weston Wellington, Down to the Wire
Vice President

February 23, 2012

Over the course of a lengthy and illustrious business career, Warren Buffett has offered thoughtful opinions on a wide variety of investment-related issues—executive compensation, accounting standards, high-yield bonds, derivatives, stock options, and so on.

In regard to gold and its investment merits, however, Buffett has had little to say—at least in the pages of his annual shareholder letter. We searched through 34 years' worth of Berkshire Hathaway annual reports and were hard-pressed to find any mention of the subject whatsoever. The closest we came was a rueful acknowledgement from Buffett in early 1980 that Berkshire's book value, when expressed in gold bullion terms, had shown no increase from year-end 1964 to year-end 1979.

Buffett appeared vexed that his diligent efforts to grow Berkshire's business value over a fifteen-year period had been matched stride for stride by a lump of shiny metal requiring no business acumen at all. He promised his shareholders he would continue to do his best but warned, "You should understand that external conditions affecting the stability of currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway."

As it turned out, the ink was barely dry on this gloomy assessment when gold began a lengthy period of decline that tested the conviction of even its most fervent devotees. Fifteen years later, gold prices were 25% lower, and even after thirty-one years (1980–2010), had failed to keep pace with rising consumer prices. By year-end 2011, gold's appreciation over thirty-two years finally exceeded the rate of inflation (205% vs. 195%) but still trailed well behind the total return on one-month Treasury bills (398%).

Perhaps to compensate for his past reticence on the subject, Buffett has devoted a considerable portion of his forthcoming shareholder letter (usually released in mid-March) to the merits of gold.

With his customary gift for explaining complex issues in the simplest manner, Buffett deftly presents a two-pronged argument. Like a sympathetic talk show host, he quickly acknowledges the darkest fears among gold enthusiasts—the prospect of currency manipulation and persistent inflation. He points out that the US dollar has lost 86% of its value since he took control of Berkshire Hathaway in 1965 and states unequivocally, "I do not like currency-based investments."

But where gold advocates see a safe harbor, Buffett sees just a different set of rocks to crash into. Since gold generates no return, the only source of appreciation for today's anxious purchaser is the buyer of tomorrow who is even more fearful.

Buffett completes the argument by asking the reader to compare the long-run potential of two portfolios. The first holds all the gold in the world (worth roughly $9.6 trillion) while the second owns all the cropland in America plus the equivalent of sixteen ExxonMobils plus $1 trillion for "walking around money." Brushing aside the squabbles over monetary theory, Buffett calmly points out that the first portfolio will produce absolutely nothing over the next century while the second will generate a river of corn, cotton, and petroleum products. People will exchange their labor for these goods regardless of whether the currency is "gold, seashells, or shark's teeth." (Nobel laureate Milton Friedman has pointed out that Yap Islanders got along very well with a currency consisting of enormous stone wheels that were rarely moved.)

When Buffett assumed control of Berkshire Hathaway in 1965, the book value was $19 per share, or roughly half an ounce of gold. Using the cash flow from existing businesses and reinvesting in new ones, Berkshire has grown into a substantial enterprise with a book value at year-end 2010 of $95,453 per share. The half-ounce of gold is still a half-ounce and has never generated a dime that could have been invested in more gold.

Few of us can hope to duplicate Buffett's record of business success, but the underlying principles of reinvestment and compound interest require no special knowledge. Every financial professional can point to individuals who have accumulated substantial real wealth from investment in farms, businesses, or real estate, and sometimes the success stories turn up in unlikely places. (See "The Millionaire Next Door.")

Where are the fortunes created from gold?


Warren Buffett, "Warren Buffett: Why Stocks Beat Gold and Bonds," Fortune, February 27, 2012. Available at: http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/. Milton Friedman, Money Mischief (Boston: Houghton Mifflin Harcourt, February 1992). Stocks, Bonds, Bills and Inflation, March 2011. Bloomberg. Berkshire Hathaway Inc. Available at: www.berkshirehathawy.com (accessed February 21, 2012).
Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Tuesday, March 6, 2012

2012 IRS e-file Refund Cycle Chart

For those of you expecting a tax refund and have filed your taxes using e-file, the IRS has posted a chart showing when you can expect your refund to arrive. Click here to view this chart.