One of the big deals of this new initiative is the removal of the loan-to-value ratio (LTV) cap on eligible fixed-rate mortgages. Now, mortgages that qualify for refinancing under the HARP have loan-to-value ratios of 80% to, well, as high as you’ve gotten yourself into.

It surprised me a little that 125% LTV wasn’t enough, but after doing some math, I can see how LTV of 200% or more are not out of the question.  In Miami, for example, inflation-adjusted home prices dropped 50% from 2007 to the end of last year.  If someone took out a fixed-rate mortgage for most of the purchase price, then the loan-to-value would be in the neighborhood of 175% today if the borrower made regular payments against the mortgage.

Unlike the first- and long-time homeowner’s tax credit, this initiative is almost completely for homeowners in over their heads.  The minimum LTV ratio is 80%.  That’s not underwater but it’s still fairly high leverage.  The expanded HARP blanket is also targeted at people who are still making their payments; to qualify, there must have been no late payments in the past six months, and no more than one during the past year.

Is this HARP initiative throwing good money after bad?

This all makes for good press but guaranteeing loans this far underwater at attractive fixed rates isn’t the kind of move the finance industry would make on its own.  Under normal circumstances, lenders like (a) to be paid back, and like (b) to get interest that’s commensurate with the risk they’re taking with lending the money.  Take away the risk of being paid back, and strange things happen, like really low interest rates for highly-undercollateralized loans.

That’s the lender’s side.  But what about the borrower’s side?  Is it throwing good money after bad to take “The Enterprises” up on this offer?  If the refinance actually does make things more affordable, yes.  Pay the sucker down faster now that the payment’s lower, or build up an emergency fund.  Take advantage of it.  The subsidy is there.  It won’t be there forever.

The economy would recover faster if the institutions and people exhibiting indiscretion were allowed to fail good and hard, but that’s not the way we’re doing it.  Look into the new HARP initiative if you think you could benefit.

(And even if you’re not underwater, if you haven’t refinanced for a while, you might be pleasantly surprised with the current mortgage rates!)

(Thanks to Sustainable Personal Finance for including this article in the Carnival of Personal Finance.)

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If we cut to the chase, there is a $9 trillion shortfall over the next ten years.  The most stringent deficit reduction measures discussed don’t even come close to addressing the problem.

Compared to proposed spending cuts here, though, this is good progress.  At that point in the discussions, there was a $10.6 trillion shortfall!  (Here are some ways to visualize this huge number.)

Danger!  Misleading graphics ahead!

Each one of these posts has an accompanying graphic:  A large red circle with the amount of the projected federal budget deficit in it ($13 trillion) and a smaller green circle with the amount of the proposed reductions and cuts ($4 trillion or $2.4 trillion).  The problem with both of these graphics is that they suggest that the problem is bigger than it is — which, given the gigantic nature of the numbers, is completely unnecessary.

How are they misleading?  When marrying numbers to the relative size of graphics, size does matter, and the sizes are incorrect.  (There a little bit of math here, so be forewarned!)  Let’s take the $2.4 trillion vs. $13 trillion graph.  I copied the graphic into Paint, and measured the diameters of the circles.  The green circle was 100 pixels across, and the red one was 298 pixels across.

To make a fair comparison between the size of two figures like this, the areas should be proportional.  This means that the red circle should have 13 / 2.4 = 5.42 times the area of the green circle.  Reaching deep into the recesses of middle school math class, we can figure out that the diameter of the red circle should be 233 pixels.  Something like this:

This is less than 298 pixels. The graphic isn’t quite as dramatic, but it’s true to the data. The same thing goes for the other graph.  The green circle was 123 pixels across, and the red one was 298 pixels across.  Running through the same argument, the diameter of the red circle should be 222 pixels:

Be careful when you’re presented with a graphic like this.  You can be misled.

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At work it sometimes means announcement of raises or year-end bonuses when there’s profit to be shared.  People may be entering the new year with a fatter wallet and a bigger paycheck.

This holiday season?  Not so much.  Googlers notwithstanding, many people found out that not only were there no year-end bonuses, but there was no year-end raise, either.  About 1.4 million US Federal employees are likely looking at no annual raises in 2011 and 2012. With the prices of groceries, gas, health care, and many other things steadily climbing, staying put is actually falling behind.

While people don’t wish that a pay freeze would happen to them, it’s far from unusual.  Here are seven things to consider doing if you’re going to be pay-raise challenged for a while:

1. Give thanks for your job. For Christians, like myself, this is part of 1 Thessalonians 5:18; it’s not a quid pro quo exchange with God, but instead a recognition that everything we have comes from Him.  In any case, a thankful heart is a much better launch pad for being proactive.  Spinning wheels with worry just makes a lot of bad-smelling smoke and wears out the tire treads.
2. Don’t panic. A pay freeze is not a pay cut, and it’s not a pink slip.  For the time being, the paychecks will continue to come in.  This is not a worst-case scenario.  Food will continue to go on the table, the lights will continue to come on, and the water will continue to run.  The basics, and a lot of the extras, are still there.
3. Recognize the wake-up call. If this pay freeze came out of the blue — heck, even if it didn’t — it’s still jarring.  Raises aren’t always regular.  It’s possible to experience a backslide with income.  Jobs, even “safe” ones like government jobs, aren’t bulletproof.  Were you ready for the announcement?  If not, it’s time.  Get ready.  Don’t ignore the wake-up call.
4. Make some battle plans. The Bad Economy is knocking on your door.  Maybe you already have another job or have a side business going, or you’ve gone back to the basics cut your expenses and have started to do the little money-saving things again.  That’s great.  Keep doing more of that.  If not, look at options for earning more and spending less.  Since you’re already not in panic mode, you have time to plan for your best way to fortify your finances and find that money that you thought you were going to get.  Revisit the basics and go from there.
5. Work your thaw-out plan. A pay freeze from one job is just that: a pay freeze from one job.  The income can be made up elsewhere, and since you’ve made plans for how to do that, you just do it.  If you feel most comfortable with another job, then go out to get one.  If you think wringing the unsatisfying expenses out of your budget is the way to go, then find less expensive alternatives to your gourmet premium whatevers.  If you want to tackle a side business, then go for it.  Plan enough to get started, and sand down the rough edges along the way.
6. Build momentum. If the pay freeze on the one job is the worst of it, hallelujah!  If it isn’t, and The Bad Economy ends up pounding the door in and you lose that job, then you’ll be glad that you just didn’t coast when you felt comfortable again.  Build the side business more, or take a battle axe to your expenses.  Build up a nice emergency fund.  The more cushion you have, the more time you have to wrestle your way out of a financial head lock.
7. View the entire process as a test. Life has ups and downs.  This is a down part, a trial, a test.  Tests teach you what you know and what you don’t know.  Just going through the test has its own benefits, even if the test itself isn’t fun.

Oh, by the way:  I’m going through this myself right now, so you’re not alone.

(Thanks to Blonde and Balanced for including this post in the Carnival of Personal Finance.)

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There’s a fair bit of activity on eBay buying and selling 95% copper cents, and the coin sorters to distinguish them from the newer zinc variety.  Why the interest, you might ask?  It’s the copper content of the cents that’s interesting.  These high-copper cents, minted for part of 1982 and most of the years before, are now worth more than twice their face value based solely on the copper content.

Basically, each one of these cents has more than two cents’ worth of copper in them.

This mismatch has come about from a decades-long, systematic increase in the money supply.  A dollar today only buys 8% of what it bought eighty years ago.  Since just the turn of this century, it already buys 22% less.  Since there are more dollars chasing the same (or nearly the same) amount of goods, prices rise on average to meet the increased money supply.  The prices of everything are affected, including copper.

The composition of the cent changed in 1982 from 95% copper to 5% tin/zinc, to 97.5% zinc, 2.5% copper.  Zinc is a cheaper metal, but a cent is a cent as far as the cashier is concerned — and as far as the Mint is concerned.  Over time, it makes less and less sense to spend the high-copper-content ones.  They’re kept instead, since at some point it makes more sense to keep them for their copper.

For the time being, though, would-be smelters would break the law if they extracted the copper from cents.  They are also forbidden from exporting anything but trivial quantities to countries where it wouldn’t be illegal.  (A similar ban was enacted after silver was removed from dimes, quarters, and half dollars.  The ban has since been lifted.)  What is still legal is shipping them within the country and storing them as just a large pile of cash.

Enter eBay and others.  You can buy pre-sorted cents, by the pound, in quantity.  Not just the older wheat cents (pre-1959) but the more modern Lincoln Memorial cents (1959-1982).  Circulated wheat cents are more sought-after by coin collectors, so they go for a premium anyway.  The newer ones, though, are still widely circulated, but they’re getting less so.

I just saw an auction for 500 pounds of 1959-1982 cents go for $1,200, with free shipping.  This price is between the face value of the money and the market price of the copper in the cents.  The face value of the lot is

500 pounds * 454 grams per pound * $0.01 per 3.11 grams = $729.90

The value of the copper in these cents is

500 pounds * $3.91 per pound of copper * 95% copper content of cents = $1,857.25

The reason for buying is appreciation of the underlying commodity in dollars. (I suppose, also, that the coins themselves become more collectible as time goes on as well.)  At some point in the future it will pay to sell these.  It may even pay to melt them (assuming the ban is lifted after the “easy money” is no longer so easy).  More to the point, though, it’s trading something that holds value with something that is clearly losing value.

Storing these old things is a cost that some people obviously are willing to bear.  People who pulled out their silver dimes are pretty happy now, I’d think; the reasoning for pulling out the copper cents is the same.  Cents are bulkier relative to their value than silver dimes, and far bulkier than gold coins, but the cents are what people can get their hands on at a discount to their true value, now.

I was born too late to see the silver money go out of circulation, but we all have front-row seats to watch the copper cent go away.  And we can watch it on eBay!

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• $225,000 is owed against a house that is currently worth $200,000 to $208,000.
• The current mortgage is at 6.75%, a couple of percent higher than current rates for equivalent mortgages.
• The savings per month would be about $350, which they plan to use to maintain and improve the house.
• The refinance process would wipe out their savings cushion almost entirely.
• They characterize their jobs as “very stable” and do not know how long they’ll be in the house.

Not easy, is it?

Two percent is a big enough difference that it is usually a good idea to look into mortgage refinancing, but is it worth wiping out $25,000+ from their high-interest savings account?  There were a number of different takes, as you might imagine.  Financial Samurai recommended going full steam ahead with the refinance:

$350 divided by $30,000 = a 11% yearly return on your investment. Pay down your mortgage and refi, it’s a NO BRAINER. Where else can you get a 11% yearly return guaranteed?

His calculations, admittedly, assume pretty liberal definitions of principal and return, but that’s not the main issue.  He sees no emergency fund as being no problem. Saving that much per month is cushion in itself, perhaps.  The readers’ jobs could be really, really stable, in which case they could go on without an emergency fund without any issue at all, or build it up slowly.

Money Crush takes the other side of the fence:

Based on what you’re said here, I wouldn’t refinance. Mainly because you’re going to be wiping out your savings and emergency fund, with no plans to replace it. If it were just wiping out savings (and not the emergency fund too, I might consider it.) Lots of people lose their “stable jobs”.

The last sentence is key.  Lots of people do lose their stable jobs. I tend to side with Money Crush on this one (if there are no other options for handling the situation available — there might be).  There are times to pay down debt aggressively, and there are times to build up emergency funds aggressively.  Now is a time to build up, and maintain, emergency funds and cash savings.  Why?  Because cash buys you time if something bad happens, and a lot of bad things can happen.  No cash, no time.  Time to carry balances on the credit cards!

An underwater mortgage isn’t a problem unless it’s made to be a problem.  Refinancing an underwater mortgage makes it a problem.  The bank won’t take the house back just because it’s underwater.  The bank will take the house back (eventually) if you can’t make the payments.  Voluntarily wiping out your emergency fund increases the risk that this bad outcome will happen.

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I enjoyed the book.  It was well-written.  (Mr. Gilbert has written a regular column for Bloomberg News for over a decade.)  What this book brings to the table is a more accessible description of financial constructs that were esoteric, if not non-existent, just a decade earlier.  After hearing about derivatives, collateralized debt obligations, credit-default swaps in the headlines as the giant banks were reeling, it was educational to read Complicit and fill in around the edges a bit.

Each chapter begins with a graph of something against time.  The “something” relates to the content of the chapter.  Here are the chapter titles, with the “Y axis” quantities in parentheses:

1. Bubbles are for Bathtubs (U.S. home ownership percentage)
2. Unsafe at Any Rating (Moody’s share price)
3. Priced for Perfection (Stock and Bond market volatility)
4. Bubbles, Bubbles Everywhere (China Foreign Exchange Reserves)
5. Judgment or Luck (Financial Corporate Profits)
6. Knight in Rusty Armor (Bear Stearns’ share price)
7. The Noose Tightens (3-month Libor)
8. Central Banks, Unbalanced (Northern Rock’s share price)
9. Et tu, Money Markets and Municipals? (European Bond Market Yield Spreads)
10. Giants Fall (Lehman Brothers’ share price)
11. Conclusions and Policy Prescriptions (Total market cap of global stock markets)

It’s fairly dense reading.  Mr. Glibert doesn’t shy away from figures or technical terms, so it’s the kind of book that needs to be gone through slowly, or more than once.  (In my case, I’d need to do both.)  But one point that came out again and again was this:  Almost everyone involved was having too much fun and making too much money — bartenders and bouncers included — to turn up the lights, announce last call, and settle all of the tabs.  But happy hour never lasts forever.

If you’re interested in a better understanding of the kinds of financial cocktails served up over the past few years — and the massive hangover that’s probably just begun — then check out Complicit.

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• Social Security checks don’t go up.
• Marginal tax bracket cutoffs don’t go up.
• The standard federal income tax deduction doesn’t go up.
• Interest rates on savings accounts are in the basement.
• Etc., etc., etc.

These bad things are all distractions from what’s really happening. Let’s compare a couple of examples.  (Before getting in too deep here, inflation is not the same thing as rising prices. Inflation is an increase in the money supply, after which rising prices follow.  But will just treat them as kind of the same thing in this post to keep things simple.)

First, an inflation example.  Say I could buy everything I needed last year for $20,000.  This year, the exact same stuff costs me $21,000 because there was 5% inflation last year.  A social security check that was $1,000 last year is $1,050 this year, but so what?  It buys the same stuff.  My savings account was earning 6%, but that’s only 1% return after inflation.

Next, a no-inflation example.  Say, this year, I can still buy everything I need for $20,000.  A social security check is still $1,000, but that’s all right, because it still buys the same stuff.  My savings account earns 1% (“in the basement”) but at least it’s a real rate of return.

Inflation – an increase in the supply of money – has been going on for decades.  It’s so entrenched in our economy that it’s commonplace.  Prices go up, sure, but wages go up thanks to inflation-based cost-of-living adjustments (COLAs).  We see larger numbers in our paychecks, and we feel richer.

But why is that we feel poorer when the money supply is stable, there’s no inflation, and therefore no COLA?  It shouldn’t, but it does.  Having no COLA next year should be a good thing, yet we feel instead like we’re falling behind.  What’s more, if we never had the need for a COLA, we wouldn’t be having this discussion! The reason “no inflation is ‘bad’ for us” now is because so many things in our financial lives are tied to inflation.

If there were no inflation (well, none beyond what was necessary to support a growing economy) then there wouldn’t be the need to tie anything to inflation, would there?  It’s putting the cart before the horse.  The COLA is around because inflation is around.  Zero inflation doesn’t take your COLA away — the COLA goes away because of zero inflation.  In the end, anyway, a true COLA wouldn’t matter at all, since it would just rise (and perhaps fall) with the money supply.

What’s the bottom line? Zero inflation by itself is not a bad thing at all.  It’s actually a Very Good Thing that we’re unlikely to see in our lifetimes.  It would mean that the money supply is stable and not being diluted.  Zero inflation only appears bad because so many credits, checks, and other goodies are tied to inflation.

It’s important to have the cart behind the horse.

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Regifting this year is up.  Way up. A Consumer Reports survey found that a little over a third (36%) of American adults said they’d recycle a gift this year, which is a 50% increase from two years ago.  Regifting is an art and MP Dunleavey has a dozen good tips for learning that art.

With Christmas decorations hitting Costco in August, and “leaked” Black Friday ads popping up, and overt announcements from Walmart a month ago promising 100 toys for $10, it’s clear that stores really, really want to sell stuff badly.  (Not that they haven’t always wanted to sell stuff, but the retail wars seem to be getting more heated.)

So the realization that more people still want to give stuff that they already have in their possession is a little telling about how bad things are, no?  This increased regifting behavior will be a drag on year-end sales:  each re-gift means, roughly, a gift that wasn’t purchased.  If there are roughly 200 million American adults, and 5% of them re-gift one $10 gift (5% is the increase of “would re-gift” adults from last year), then that’s $100 million less that retailers will get this year, just due to regifting. Add to this outright lost sales, and pretty soon we’re talking real money, real hits to the bottom line, and real downsizing.

But you know what?  That’s what should happen. When people overspend, they need to underspend.  When people underspend, businesses that rely on people spending will run into hard times.  It’s not our duty to keep businesses afloat.  We should use the fruits of our labor in ways that benefit ourselves, and right now that includes reducing debt and saving for retirement.

So dust off those Christmas knickknacks, rewrap them, and pass them on, preferably to people other than the those who gave you said knickknacks.  Lots of others are doing it!

Thanks to M is for Money for including this post in the Carnival of Personal Finance.

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If this US Debt Clock is accurate, we’re getting a new person on the unemployment roster every 17 seconds now.

What can you count on in this economy?  I think the only thing that you can absolutely count on in this economy is that you can’t count on anything in this economy. Retirements have been upended by plummeting 401(k)s and IRAs.  Nest eggs have been cracked by crashing home values.  Many people, all of a sudden, won’t be able to retire.

It’s foolish to take anything for granted.  There’s far less within our control than we probably realize, and proposed solutions that aim to make things better will almost certainly just make them worse.

When you think about “preparing for the future,” think instead of “hedging against the future.”  How?

• Cushions, cushions. Bolster that emergency fund to buy time in the face of job loss.  Bolster your food supply in case price controls cause shortages.  (Price controls are another solution that will backfire.  Think gas station lines in the 1970s.)
• Diversify your investments. If you’re heavy in anything (or only have a couple of asset classes) look around some more.  And don’t forget to invest in yourself.
• Diversify your income streams. Only have one income stream?  Start working on another!  And then another.  Your one income stream can go bye-bye at any time.
• Retire into something rather than just retire. It would be great if one of your new income streams involves something you really enjoy, and can do well into the traditional retirement age.
• Take care of your health. I’ve recommitted to this. The less you need health care, the better, because it will be more expensive, and you’ll wait longer to get it.
• Pray.

Thanks to The Censible Life for including this post in the Carnival of Personal Finance.

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This past weekend there was a yard sale that was initially advertised for Friday and Saturday.  The folks taped over the sign the next day: “Sun.”  So we stopped by there after church, and bought a couple of things.  I recognized some of the collectible plates they had as being at the previous day’s flea market.

On my way to work yesterday, they had replaced the taped-over sign: “Mon.”

This morning: “Tue.”

That’s not normal, but even more so, there was another yard sale just down the road that also had had their stuff out for five days.

What’s up?

It could be a number of things:

• The weather is getting colder and they’re taking advantage of it before they have to wait until spring to sell their stuff again like this.
• They really like running yard sales. Hey, nothing wrong with that at all!
• They own a business (maybe an eBay business) and they’re trying to unload some inventory at more reasonable prices, without making the buyers pay shipping.
• They are just selling off their stuff because they need to. If it were just to get rid of stuff, there was a thrift store just down the road where they could have dropped it off.  But that’s not what they did.  They tried to sell it, five days in a row.

In any case, these are all great things to do, and I’m not to judge these folks or what they’re trying to do.  If the reason they’re selling their stuff this way is because they need the money, then it’s probably a sign of the times:  People have bought more stuff than they need, with money they didn’t have, and now need the money more than the stuff.

There will be a whole lot of liquidation before the economy turns up again.

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