REPOST: Bond investing basics

Do you want invest in bonds? Here are some basic tips that you should keep in mind:

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1. Bonds are fancy IOUs

Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money for a certain period of time to the issuer, be it General Electric or Uncle Sam. In return, bond holders get back the loan amount plus interest payments.

2. Stocks do not always outperform bonds.

It is only in the post-World War II era that stocks so widely outpaced bonds in the total-return derby. Stock and bond returns were about even from about 1870 to 1940. And, of course, bonds were well in front in 2000, 2001 and 2002 before stocks once again took charge in 2003 and 2004. By 2008, however, the bond market had far outpaced the stock market once again, and did so again in 2011.

3. You can lose money in bonds.

Bonds are not turbo-charged CDs. Though their life span and interest payments are fixed -- thus the term "fixed-income" investments -- their returns are not.

4. Bond prices move in the opposite direction of interest rates.

When interest rates fall, bond prices rise, and vice versa. If you hold a bond to maturity, price fluctuations don't matter. You will get back the original face value of the bond, along with all the interest you expect.

5. A bond and a bond mutual fund are totally different animals.

With a bond, you always get your interest and principal at maturity, assuming the issuer doesn't go belly up. With a bond fund, your return is uncertain because the fund's value fluctuates.

6. Don't invest all your retirement money in bonds.

Inflation erodes the value of bonds' fixed interest payments. Stock returns, by contrast, stand a better chance of outpacing inflation. Despite the drubbing stocks sometimes take, young and middle-aged people should put a large chunk of their money in stocks. Even retirees should own some stocks, given that people are living longer than they used to.

7. Consider tax-free bonds.

Tax-exempt municipal bonds yield less than taxable bonds, but they can still be the better choice for taxable accounts. That's because tax-frees sometimes net you more income than you'd get from taxable bonds after taxes, provided you're in the 28% federal tax bracket or higher.

8. Pay attention to total return, not just yield.

Returns are a slippery matter in the bond world. A broker may sell you a bond that is paying a "coupon" - or interest rate - of 6%. If interest rates rise, however, and the price of the bond falls by, say, 2%, its total return for the first year - 6% in income less a 2% capital loss - would be only 4%

9. If you want capital gains, go long.

When interest rates are high, gamblers who want to bet that they'll head lower should buy long-term bonds or bond funds, especially "zeros." Reason: when rates fall, longer-term bonds gain more in price than shorter-term bonds. So you win big - scoring a large potential capital gain in addition to whatever interest the bond may be paying. If rates rise, on the other hand, you lose big, too.

10. If you want steady income, stick with short to medium terms.

Investors looking for income should invest in a laddered portfolio of short- and intermediate-term bonds. For more on laddered portfolios, see our "Sizing up risks."

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REPOST: Goals for setting priorities

What are the things that you should bear in mind when budgeting? Set the proper financial priorities by reading these tips from CNN.com:

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1. Narrow your objectives.

You probably won't be able to achieve every financial goal you've ever dreamed of. So identify your goals clearly and why they matter to you, and decide which are most important. By concentrating your efforts, you have a better chance of achieving what matters most.

2. Focus first on the goals that matter.

To accomplish primary goals, you will often need to put desirable but less important ones on the back burner.

3. Be prepared for conflicts.

Even worthy goals often conflict with one another. When faced with such a conflict, you should ask yourself questions like: Will one of the conflicting goals benefit more people than the other? Which goal will cause the greater harm if it is deferred?

4. Put time on your side.

The most important ally you have in reaching your goals is time. Money stashed in interest-earning savings accounts or invested in stocks and bonds grows and compounds. The more time you have, the more chance you have of success. Your age is a big factor - younger people (who have more time to build their nest egg) can invest differently than older ones. Generally, younger people can take greater risks than older people, given their longer investment horizon.

5. Choose carefully.

In drawing up your list of goals, you should look for things that will help you feel financially secure, happy or fulfilled. Some of the items that wind up on such lists include building an emergency fund, getting out of debt and paying kids' tuitions. Once you have your list together, you need to rank the items in order of importance (if you have trouble doing so, use the CNNMoney.com Prioritizer for help).

6. Include family members.

If you have a spouse or significant other, make sure that person is part of the goal-setting process. Children, too, should have some say in goals that affect them.

7. Start now.

The longer you wait to identify and begin working toward your goals, the more difficulty you'll have reaching them. And the longer you wait, the longer you postpone the advantage of compounding your money.

8. Sweat the big stuff.

Once you have prioritized your list of goals, keep your spending on course. Whenever you make a large payment for anything, ask yourself: "Is this taking me nearer to my primary goals - or leading me further away from them?" If a big expense doesn't get you closer to your goals, try to defer or reduce it. If taking a grand cruise steals money from your kids' college fund, maybe you should settle for a weekend getaway.

9. Don't sweat the small stuff.

Although this lesson encourages you to focus on big-ticket, long-range plans, most of life is lived in the here-and-now and most of what you spend will continue to be for daily expenses - including many that are simply for fun. That's OK - so long as your long-range needs are taken into consideration.

10. Be prepared for change.

Your needs and desires will change as you age, so you should probably reexamine your priorities at least every five years.

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REPOST: The Mystery Of Real Estate Agent Compensation

Richard Green shares the ins and outs of the real estate agent compensation in this Forbes.com article.

Real Estate agents are valuable–if they weren’t, we wouldn’t have them. The three times in my life I have sold a house, I thought the agent earned his/her commission.

But the commission structure –the agent gets a fixed percentage of the sale price of the house–makes no sense. (Steven Levitt pointed this out some time ago). There is a price at which anyone could sell a house without an agent–let’s call it 80 percent of market value (it may be more or less). So for the first 80 percent of the sales price of a house, the agent is adding no value.

But now let’s say it takes real effort to sell a house for more than 80 percent of market value. This means for every dollar the seller receives above 80 percent, the agent is producing more value than the typical commission percentage they currently receive.

This produces a perverse set of incentives. Agents have reason to sell the house quickly, but not at the highest possible price, because they don’t get rewarded for their effort. A compensation structure that would align everyone’s interest would be more like a consignment structure–one where the agent would get no compensation for any sale of less than an agreed to amount, but would get a large fraction of any proceeds above the agreed to amount. This would likely produce higher prices for the seller and higher compensation for the agent.

I understand that agents face upfront costs to marketing a house–it would be reasonable for them to charge a fee to recover those costs, regardless of outcomes. But we don’t observe that either.

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Gold prices fall again near 2013 record lows

Gold prices have taken another beating as they fell close to the lowest levels.

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The precious metal is currently valued at $1,245 per ounce, near the lowest it traded for $1,211 an ounce in June. Its current value is down by 25 percent from prices earlier this year.

“Gold has been under pressure since the European Central Bank announced a surprise interest rate cut earlier this month,” according to Carlos Sanchez, an analyst at CPM Group.

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The move immediately created an impact of increasing the value of the dollar against the euro, making the dollar-denominated gold less attractive to buyers. The price of gold further fell after the Federal Reserve released the minutes of its October meeting.

In the report, speculations were rife that the central bank could taper off on its bond-buying program, known as quantitative easing, as early as December of this year. This means that support for gold prices could be held back or cut altogether.

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Sanchez believes, though, that while prices are near its record lows, the smart trader sees the opportunity of a mid- to long-term investment. He also believes that “the economy is not yet strong enough for the Fed to begin tapering next month.”

Gold prices have been taking a massive hit for some time as traders reinvested their money in the stock markets in exchange for higher returns.

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Thirty-year mortgage rates go down once again

Image Source: dailyfinance.com

Earlier this month, the news of the government shutdown also came with reports on the drop in the average for fixed mortgage rates in the US for the third straight week—the lowest it has been since early July. According to Freddie Mac, the average rate on the 30-year loan fell from 4.32 percent to 4.22, while the average on the 15-year fixed loan dropped from 3.37 percent to 3.29 percent.

The decline in rates started when the Federal Reserve continued its $85-billion-a month in bond buys instead of slowing down. Meanwhile, the shutdown made investors sell their stocks to buy Treasury bonds. Mortgage rates are affected by the yield on the 10-year Treasury note and the 10-year note traded lower in early October at 2.63 percent, down from the 2.71 percent in late September.

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While rates may have dropped, potential homebuyers have problems looming over the horizon as the Federal Housing Administration, responsible for guaranteeing 30 percent of home mortgages in the US, will be unable to continue approving loans if the shutdown continues until it runs out of funding.

When that happens, many prospective homebuyers will be unable to purchase homes until the government reopens. Home sellers will also have to wait before they can sell off their property, and activity in the housing market may continue to be slowed until backlogs are cleared.

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REPOST: Beware of fraud by closing agents at real estate settlements

This Los Angeles Times article shares the basic steps to protect yourself from settlement fraud.

In little-noticed proceedings earlier this year, 11 people pleaded guilty in a federal court in northern Virginia to a scam that fleeced banks out of millions of dollars.

According to the charging documents, the defendants were involved in overlapping conspiracies in which they would systematically alter the terms of real estate closings so lenders would send more money than they needed to. The thieves would then pocket the difference.

The case shines some light on perhaps the shadiest side of mortgage fraud. Shady because very few people know about it, and of those who do, few are willing to talk about it.

Settlement fraud, also known as escrow or closing fraud, doesn't occur very often, said Steve Gottheim of the American Land Title Assn., the trade group for people who review and insure titles and handle most real estate closings.

"It's extremely rare," Gottheim said. "Less than one half of 1% of all real estate transactions involve any type of fraud." But it does happen, he conceded.

Andrew Liput of Secure Settlements, a company that vets otherwise unsupervised closing professionals on behalf of lenders (who deliver billions of dollars into the hands of closing agents with little or no protection against fraud), estimates that 15% of the $4 billion lost by lenders to mortgage fraud last year — some $600 million — occurred at the closing table.

We're not talking about illegal or even questionable flipping arrangements, or even straw buyers. Those schemes are counted elsewhere. Rather, we're talking about nickel-and-dime cases in which the closing sheet you sign and the one sent to the lender are different, and the closing agent keeps the difference.

Maybe they change the amount of a single line-item closing cost, or perhaps two or three. You might pay $10 more here than you should have, or $25 more there. Or maybe the sales price you paid is lower than the amount the lender is asked to fund. Thieves can do wonders with Wite-Out.

Often, the difference is pocket change compared with the hundreds of thousands of dollars involved in the overall transaction. But alter enough settlement documents and pretty soon you're talking serious money.

Last year, for example, a South Florida closing agent was charged with falsifying HUD-1 settlement statements in 32 closings and stealing more than $3 million.

Big money is also lost when the closing agent fails to pay off a seller's lien and takes off with the money. The seller receives his due — the difference between the selling price and the mortgage or mortgages he had on the property — but the old lender gets nothing. And until that loan is paid off, the new lender — your lender — doesn't have a first-position mortgage.

An already disbarred Massachusetts lawyer was sentenced last year to 51 months in prison for failing to pay off existing liens and diverting more than $3 million into his own accounts. And Liput has "seen several cases" in the last six months in which nefarious title agents doctor their reports so the prior liens remain invisible.

Generally in cases of closing fraud, it's the lender that's on the hook. As long as you buy owner's title insurance at settlement, or at least what's called a "closing protection letter," the lender will bear the brunt of the loss, Gottheim said. But even if you decline to buy your own policy, he said, you'll "get some ancillary benefits from the lender's policy."

"Ninty-nine percent of the time when escrow funds are taken, the lender or the title insurance company bears the risk," Gottheim said. "And in many states, title agents buy into what's called 'crime bonds.'"

The lender's policy, which you pay for at closing, protects the lender against fraud and defects in the title. An owner's policy, which protects you and guarantees that the title insurance company will work on your behalf to correct problems, should cost about $250 when issued simultaneously with the lender's policy. The closing protection letter is sometimes free; other times, there's a small fee.

Your real headache would come when you go to sell your property, or perhaps refinance, and find out there's an existing mortgage or two on it that have never been paid off. If that happens, it could hold up your sale, perhaps delaying the deal for so long that your buyer decides to drop out and find a house elsewhere.

Here are some basic steps to take to protect yourself against this kind of "back end" fraud:

•Obtain your loan papers early, and make sure the numbers line up with the documents you are given at closing.

•Shop for a trustworthy professional. Don't be steered. Call your state regulator to make sure the agent's license is current, and ask if there have been any complaints lodged against him or her. But even then, be careful. Liput said yhat "nearly all the bad actors" his firm has unearthed were licensed and were members of a trade association.

•Ask for a color ID, and look for some kind of seal on the door or stationery that shows the agent has been vetted by an independent third party. In many instances, charlatans set up bogus companies that don't really exist. They just hang out a shingle and start doing business. Then, before you know it, they split, only to set up shop under another name somewhere else.

•When interviewing closing agents, ask how long they've been in business, if they are insured and if there have been any claims against them. You'll also want to know if they've ever been sued or lost their licenses. All of this is public information and can be discovered with what Liput calls a little "basic ground-level investigation."

•To protect yourself from being manipulated, schedule the closing a few days in advance of your move. If something smells fishy, walk away. You have every right to stop the show at any time.

•If you feel the need, hire an attorney to represent you at the settlement table. Even if the title pro you pick is legit, he or she represents the lender's interests, not yours.


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