Archive for the ‘Ask The Magician & FAQ’ Category

And now for something completely different…

We keep chickens.

They lay a little; we get three to four eggs a day, and have been as high as eight.  We have rebuilt the coop three or four times, and have a good sturdy one now that has the added benefit of being portable, so we can move the coop off its base and scoop out the nitrogen-rich (but very smelly) compost there.  Good for the garden.  And the birds are almost family.  We love animals here.  Except dogs.

But there are problems in the flock. One of our chickens has been picked on so much she huddles in a corner of the coop and will not move. We got her out of the coop and she’s outside now, getting water and food, but not moving about much. Perhaps she can be rehabilitated, perhaps not.

This isn’t too uncommon. There’s a specific pecking order – that’s where the term comes from – and it’s not healthy. Two of our chickens are fairly free-range, as in they know how to get out of the coop and run about the neighborhood. When we get them back in, they don’t get on with the others at all. They aren’t part of the flock. But it’s spring planting season and they can’t be out in the wild eating people’s peppers.

We’re going to try a small side coop, and rotate the chickens through that in the hope that we can identify our four or five layers. We need to know who is laying, and who is dinner.  We’re all about laying chickens, not freeloaders.


Gabriel still limps a bit, when he’s tired, and he doesn’t run fast, but he is running about and gaining confidence with the leg.  It buckles on him occasionally, but not very much any more.  So all in all, if he’d stay in his bed at night, we’d be almost back to normal.

A Primer on Federal Tax Credits

Many people have been asking recently how the Federal tax credit works for home purchases.  Here is the straight dope:

If you:

  1. Have not owned a home in the last 3 years (this means you have not been on the title of a primary residence)
  2. Have income less than $250,000 last year
  3. Are purchasing a home less than $720,000 in value
  4. Have your new home under contract (this means a written agreement signed by both parties) by April 30
  5. Close the purchase (this means sign the documents, fund the loan, and transfer the title into our name) by June 30

then you qualify for an $8000 tax credit on your federal taxes.  The credit is fully-refundable, meaning that you get it even if you owe no tax.  You may file it on your 2009 taxes.  You may also file your taxes now, close later, and file an amendment claiming the credit.  The rumor is that the IRS will audit everyone that takes this credit* (seems unlikely, but that’s the rumor), so be forewarned.

For the long-time homeowner tax credit:

If you:

  1. Have owned your primary residence for at least 5 years
  2. Have occupied that home as your primary residence for four consecutive years of the five
  3. Purchase a new home (new to you, it does not have to be new new)
  4. Get the new home under contract (see above) by April 30
  5. Close the purchase (see above) by June 30

then you qualify for a $6500 federal tax credit.  Same terms apply as those above, except that there is actually a way to document your qualifications, and you should expect to have to.  Ask for a copy of the title report on your current home; your mortgage lender should be happy to provide that.  We are, anyway.

*It being impossible to prove a negative – how, exactly, can you prove that you have NOT been on title on a home in the last three years? – I don’t know how the IRS will be able to dispute this.  They will surely ask for a credit report, and it would be a really good thing if there were no active mortgages on it in the last three years.  But if you own a home outright, it’s going to be complicated for the IRS to prove that, especially if you have some sort of rent that you claim on your taxes.  Not encouraging anyone to cheat, here; I’m just sayin’.

It’s a Start.

Lehi Utah is my home on purpose.  I grew up outside Washington DC in a sprawling suburb, but spent a lot of time in the city and got to know it pretty well.  I like cities.  They’re fun.  I’ve been to most of the big ones in the US (with the sole exception, I think, of Houston), and I like the unique character of each.  Except Cleveland, but that’s another story.

But a city isn’t a big mass of people.  A city is a very large conglomeration of smaller communities, that all happen to be in close proximity.  Nobody knows “Manhattan”, no matter how long he’s lived there.  He knows his deli, his bookstore, his side of the street.  The ones that love New York the hardest are the ones that know their neighbors the best.  Those are the people that build communities.  The people I admire most are the ones that start making friends with the locals fifteen minutes after arriving.

Contrary to generally accepted ideas, this kind of community is just as possible – and just as critical – in Manhattan as it is in Lehi.  In small towns, it’s easier to get to know the locals because those are the only people there, but smart people, those that are the most fun to be around, get to know the locals wherever local is.  Maybe that’s harder when the local coffee shop is Starbucks instead of Beans and Brews, and the local burger joint is Burger King instead of Emmetts, but I wonder.

Most of you know that I am a relentless advocate for local business.  I love small business in whatever locale, no matter how small.  I have been known to drop a $20 bill on a lemonade stand.  When I moved to Lehi about 5 years ago, it was the smallest city I had ever lived in by some hundred thousand people.  I loved it immediately.  I started shopping at Kohlers instead of Albertsons.  I joined the Chamber of Commerce and got an immediate tour of historic Lehi from Carl Mellor, who runs the 120-year-old Lehi Hotel.  I ate at Porter’s Place.  It felt like home.

But I noticed that that wasn’t universal.  Lehi was in the process of tripling in size over an 8-year period, and there was a lot of new housing going up with people in it that used Lehi like a hotel; they slept here and ate room service, but went to work somewhere else and generally took entertainment and meals in other cities.  Part of that is Lehi’s fault – there is now a movie theater in town, but there wasn’t until recently, and the number of restaurants is tiny – and part of that is just bad luck, with the main arterial road in town being owned not by the city but by the state of Utah (hence largely unimprovable).  The Home Depot in American Fork killed off Peck’s Hardware on Lehi’s State Street, and the WalMart and Lowe’s and Costco seemed poised to do the same to other local businesses, such as they were.  I worried that Lehi would fail to maintain its character in the face of this chain-store onslaught.  Worse, I feared that Lehi would lose its sense of community, the ties that bind people together with the places they live.

Let me add parenthetically that I love big business as well as small business.  I shop at these chain stores, too (though not nearly as often as I used to).  I have nothing against WalMart and Lowe’s, Applebee’s and Chili’s.  This is not a rant against globalism and multi-national corporations.  Far from it.  I have, however, something else in mind.  Money spent in your local community stays there far more surely than money spent in a chain store.  It’s a more efficient delivery vehicle for value.  If you want your local city to provide services, your local stores to thrive, and your local housing market to retain (or increase) its value, the best way to do that is to inject your money into the local economy, and you do that much more efficiently at Broadbent’s General Store than at WalMart (see the 3/50 Project for more).  It’s not just good for the local business owners; it’s good for you.

So I moved my business to Main Street.  I’d have gladly bought a building – almost did, though thank goodness I was denied the loan (the building later collapsed) – but I settled for renting the place at 60 West.  That’s the address.  60 West Main.  No suite number.  No floor number.  Heck, there’s only one room in the building, unless you count the bathroom.  We all work in the one area, no walls, no cubicles.

Then I wanted to find a group of people that was committed to local business.  Not just “yeah, we like it”, but “I stayed awake all night thinking of how to get more people to go to your store”.  I wanted people around that were desperate to make a Lehi community.  I had Jonathan Heaton and his excellent insurance agency.  And Olivia Votaw of Girl With Red Lipstick.  And Amy Jo Yates, a longtime friend.  And for a long time, they was it.

So we decided to start knocking doors.  Since then I’ve met Mark Wilson in the architect’s office next door (he’ll be the Lehi Rotary Club President in about two weeks), and Sebastian moved in one door farther down about a year ago with his sign company.  Jonathan and his excellent insurance agency went in with me to also rent the building at 68 West, just next door.  I met Bob Trepanier, who’s run Porter’s Place for a generation, and Charlie and Sterling, who put Charlie Boys’ Carolina BBQ in the cottage a couple doors down (get the beans).  Then Nathan and Daniela Larsen put Classic Books and Gifts in on the corner, Lehi’s first and only bookstore.  Pam Mayfield, one block down, cuts my hair in the Lehi Old Town Barber’s (look for the barber pole; if it’s twirling, she’s in).  Fire Chief Dale Ekins (another Rotarian) owns the Pioneer Party and Copy, then there’s the Lehi Bakery (legendary square donuts).  There’s Carl at the Lehi Historic Hotel (now the Rockwell Hotel), and down another block is Flowers on Main and the incredible James and Kris Belcher.  That’s what we call the sunny side of the street.

On the shady side there’s Dave Lym’s insurance agency, and next door to him Pastor Chuck runs the Timp Baptist Church.  There’s the Bridal Shop there that has been in that spot for almost 100 years.  To the east, Emmett’s makes the best food in town (as long as you like burgers) and Ethel’s is the ice cream shop (real hard ice cream!).  That place can give you heart failure if you don’t watch it.  But just today, Allison’s Organics opened Lehi’s first organic market (between the tattoo parlor and the karate studio), so now we have some balance.

There’s something started here on Main Street.  There’s a group here now that wants to see Lehi become something better, both what it used to be, and what it always wanted to be but never was.  I’m just a Lehi Utah mortgage guy, and just one guy at that.  Things aren’t so rosy out there for any of us.  The economy is huge and much more powerful than I am.  I don’t know how big a difference I can make.

But I’m encouraged by the last few weeks.  There are only a few of us.  But it’s a start.  And we believe.

P.S. If I forgot you, you’ll have to remind me in the comments.  I tried to get everyone, but again, I’m just a guy.  And if you didn’t know that the Main Street Gang existed, if you didn’t know that anyone was organizing this kind of “Shop Lehi First” effort (kudos to Local First Utah as well for their work in this area), well, now you know.  Join us (, or tweet me @chrisjoneslehi).

A Conundrum Wrapped in a Paradox, Stuffed in a Burrito

There’s a poll on Ad Age’s website asking the question: Is Now the Time to Consider a Media Campaign to Get Consumers Spending Again?

Not too surprisingly, since the poll is being held on an advertising website, the response is running heavily in favor of “yes”.  But even if it weren’t, I think that would be the general mood.  Every talking head, most everyone you meet, thinks the economy is going into in the tank, and thinks that it is going into in the tank because the consumer is not spending enough money.

Part of that is true.  Part of it is not.  Let’s use an analogy.

My sister runs half-marathons.  Or, at least, she ran a half-marathon last week, so for me, that means she runs them.  She can run a long, long time, but she cannot run forever.  Eventually, she has to stop.  Now, I guess it’s true that she doesn’t HAVE to stop, at least not right there at the finish line.  She could keep running for a bit.  But sooner rather than later she’ll find that she’s running on borrowed reserves, that she needs to re-tool and rest and get food back in her, or she really will have to stop altogether.

TADAAAAA!  Same thing is happening here.  For a long time, the economy has been running on credit, that is, people are spending money they don’t have yet, hoping that the future will bring sufficient funds to pay back what they are spending now.  Now, if you are the only one doing that, it’s a problem but not a desperate one.  When everyone does it, however, there’s potential for a catastrophe.  Essentially, much of what everyone has been paid over the last thirty years was borrowed.  Now the bill is due, or, more accurately, the bills have been mounting steadily and they have now reached the point where the bill is larger than the income.

What smart people do when this happens is they look at the bills they have to pay, and they start cutting.  Nordstrom becomes Nordstrom Rack becomes Ross becomes the Salvation Army.  Market Street Grill becomes Outback becomes McDonalds, becomes “ah, I’ll have a piece of toast and go to bed”.  Vacation in France becomes the Grand Canyon becomes two days skiing becomes a Netflix disk of 24, the Second Season.  Etc.  Driving gets reduced, spending slows, people get defensive.  Now, I’ve written a lot about saving and what I call Financial Defense, and obviously really smart people play defense all the time, not just when things get tough.  But when they do, everyone starts playing defense.  This is terrible news for big chunks of the economy.

If you’re in luxury items, you’re in trouble.  You might survive (there are good ways to do that, but that’s not for this post), but you’re going to have to watch it.  If your business model depends on people paying $7 for a scoop of ice cream, you might have difficulties coming.  If you depend on true, non-food luxury sales, like for instance high-end art, you’re dead.  You will, absolutely, have to change what you sell, at least for a while.  In every recession, there are dead bodies, and if you think most of the dead bodies are going to be on Wall Street, you’re nuts.  Most of them will be on your street.  Businesses will have lower revenue, which means they have to cut something, and that something is you.

Less money coming in means you have less to spend.  It’s a very tight circle.  This is the cycle we’re in right now.  There is a way out, but it is NOT the way out that is currently being considered on Ad Age, or, in fact, anywhere else that I can find.  The solution to the decline in consumer spending is NOT throwing hundreds of billions of dollars at people in the hope that they will spend it (Stimulus I).  It is NOT throwing hundreds of billions at banks, hoping they will lend it (Stimulus II) – because PEOPLE DON’T NEED TO BORROW MORE MONEY RIGHT NOW.

What they need to do is LESS borrowing and more retirement of debt.  They need to get out of debt altogether.  Believe me, if the lending in the US vanished, and the debt in the US went with it, spending would skyrocket.  Who doesn’t want to spend money once they have no debt to worry about?  Seriously now, if you were in a position where you had no debt at all, no house payment, no car payment, no debt payments at all, how fancy would you eat out?  How many more movies would you see?  I you’re like most households, elimination of your debt would close to octuple (that’s 8x) your spendable cash.  Forget shopping sales.  You could go to any store, any time, and buy whatever you wanted (within reason).  Retirement saving becomes really, really easy if you don’t owe anything but the light bill and property tax.  Every part of the economy would benefit, and would do so in a sustainable way – to go back to our analogy, my sister would then be able to run forever, faster and faster.  No breaks.  Endless energy.

THAT is how we get out of the trouble we’re in.  Unfortunately, to do that we need two things we haven’t got – discipline, and patience.  So it isn’t going to happen.  What we’re going to get instead (on the macro level) is a fellow coming to the end of the marathon with a cattle prod and goosing the runners to keep going long past the point where they have strength.  What we’re going to get is people running past the finish line as if they have unlimited strength, and can borrow forever.  Both of these things lead to disaster.

So whatever others do, don’t you be stupid.  Refuse to be goosed.  Save your money, and save faster by getting rid of your debt. All of it.  Yes, even your mortgage.  Just say no.  Cut.  Save.  Whatever happens in the general economy, you be smart.

It’s Not Pork, It’s HAM.

The government unveiled the Home Affordable Modification (HAM) program today, and the provisions are interesting, exciting, and devastating, depending on who you are.

First the interesting part.  If you are:

1. Anyone with an FHA or VA loan
2. Anyone that doesn’t own a home
3. Anyone that has a mortgage greater than $729,750 (don’t ask me, I didn’t make it up)
4. Anyone that got a new mortgage this year
5. Anyone that cannot verify his income
6. Anyone that is not willing to claim “financial hardship”, meaning some sort of negative change to employment, income, or loan terms over the past year or so
then the terms of the HAM program are interesting, because you don’t qualify for a mortgage modification under this program, and that means that the benefit you get from this is that your tax dollars are going to be used to pay other people’s mortgages for the next seven or eight years.
If you are not any of the people described above, then you at least have a shot.  Your lender MUST consider your application if you ask them to (though they can eventually reject it).  Your HAM comes in the following flavor:
1. Your interest rate will be modified by your lender until your mortgage payment is 31% of your gross monthly income, or just above that.  By “payment”, they mean principal, interest, taxes, insurance, and HOA or condo fees.  The rate may be reduced as low as 2%, but no lower.
2. There are no costs to you of any kind.
3. The interest rate will remain at the reduced level for 5 years, at which point it will rise, 1% per year, until it hits the rate cap.  The rate cap is the market interest rate at the time of modification – today it would be 5.25%.  Your rate will remain at that level until the note is due or the loan paid off.
Sound exciting?  Thought it would.  Here are the things that don’t matter:
You have a bad credit score
You are currently delinquent
You are currently in foreclosure
You are currently bankrupt
You are upside down in your house (owe more than it is worth)
None of these things will disqualify you.  The lender is going to verify your income, and they are going to try to prove that you are not a danger to default, so they can deny you.  It is not in the lender’s interest to modify your loan, so be prepared for skepticism and the third degree.  But if you qualify, the lender MUST grant the modification.
Now for the devastating part.
If you are hoping this will help the economy, you’re delusional.  Yes, it will probably stem the tide of foreclosures, at least a good chunk of them.  But the damage to servicing banks will be beyond anything yet imagined, and all of them – ALL OF THEM – will have to be nationalized.  Essentially, the federal government will be the only lending entity in the US.
Don’t believe me?  Think I’m exagerrating?  Check this out: the government estimates that seven to nine million homeowners will benefit from this program.  Ha.  The problem with the government in general and THIS government specifically is that they don’t understand how markets work.  People are going to move Heaven and Earth to get a slice of this HAM.  A fixed rate for 5 years as low as 2%?  I know good, decent people that would commit felonies for that.
But they don’t have to.  Not by a long shot.  All they have to do is get in financial trouble.  Do I have to describe to you the myriad ways that is possible?  Come with me as I describe just one: furloughs.  As an employer, I have two employees that might qualify for this program.  As a small business owner perpetually strapped for cash, I can always use to reduce my expenses.  All I have to do is furlough my people and PRESTO! they’re going to qualify.  The business reduces its overhead, the employees get a large, government-mandated interest reduction, and everyone is happy except Countrywide and Wells Fargo, who have mortgages currently at 6.5% that will now be at 3%.  I hire the people back, and away we go.  It’s so simple it makes stealing candy from a toddler look like a manned mission to Mars.
That’s one idea.  It took me and my staff exactly seven minutes to come up with it, and we are not excessively bright, either.  There are some really smart people out there, and I can’t wait to see what they come up with.  They have time – the program continues for another three and a half years.
Did you miss the part where this is devastating?  Let me explain.  Banks currently have on their balance sheets loans at certain interest rates.  Now, the bad loans everyone knows about, but the good ones are the things that keep the bad ones from destroying the entire enterprise.  HAM takes those loans and makes them all spectacularly risky.  No bank will be able to count on those 6%, 30-year notes to non-delinquent borrowers remaining on their balance sheets.  At any time they might be forced to modify them to much lower rates.  They can’t be securitized well under those circumstances.  Banks can’t back lending with assets they can’t estimate the value of.  Around and around we go.  Let’s stick it to the banks, we say, then we wonder why nobody can get a mortgage loan anymore.  These are businesses, and they exist only so long as they can make money.  When they can’t, what used to happen was that they went bankrupt and a competitor bought them.  Now what happens is that the government takes them over.  I confidently predict that almost every servicing bank in the US will have that happen in the next 18 months because of this program.
It’s also devastating for the mortgage lending industry, of which I am a tiny part.  At one blow, more than half of my potential lending pool was destroyed by HAM.  All of my conventional borrowers, with the exception of those that have so much income that a 31% DTI wouldn’t help them, are no longer candidates for refinances.  I spent 10 years building a database large enough to sustain my business, and now, essentially, I have to build the entire thing all over again with FHA borrowers and purchasers.  It is vanishingly unlikely that I will be able to do so in this kind of market.  The one saving grace of my business this last year and a half has been low interest rates.  Well, they’re still low.  But they’re not THAT low.  How can I compete with the Audacity of Hope?
So there you have it, folks.  The Home Affordable Mortgage program.  If I didn’t already know, I’d wonder if pork and ham came from the same animal.