Online Financial Tips

Archive for January 14th, 2012

Right now this is a very relevant question – Can an independent net branch of a licensed FHA Lender or Broker legally originate FHA loans under HUD rules?

HUD recently answered this question with a big, “No, you can’t” in October 2007. HUD did this by focusing on brokers who are not FHA-approved brokers.

HUD reasoned as follows: “In transactions where the mortgage broker is not an FHA-approved broker, the loan origination services cannot be performed. Under these circumstances, RESPA would prohibit the payment to the non FHA-approved mortgage broker because those services, under FHA regulations, would have to be performed again by either an FHA-approved lender or loan correspondent. The payment to the unapproved broker for duplicated services amounts to an unearned fee in violation of section 8(b) of RESPA.”

So the real question really comes down to whether you are an FHA approved broker when you associate with a net branch lender? To answer this question, you need to understand the basic rule that all originators who work for an FHA approved broker must be a W2 employee of that broker.

Before we get to this rule, note that there are companies out there to consider for FHA programs. You Just need to find the right company that is well established and knows what they are doing to stay in compliance for the long term.

This means that all compensation paid to the loan originator must be in the form of commission earned from the loan and must be paid W2 (with all applicable federal and state taxes deducted) on the originator’s paycheck. No monies can be paid 1099 for FHA business.

This is where most net branches fail to meet the HUD requirement since many net branch lenders pay their loan officers on a 1099 basis to avoid paying employer payroll taxes and this is the problem with trying to net branch FHA loans. You might therefore consider getting your own FHA license or at least learning about what is required to see if now is the right time for your company to become FHA approved.

When all else fails and the markets are in a pickle, you can always count on your uncle to be there for you and your portfolio.

Your Uncle Sam, that is.

Except right now. Uncle Sam has troubles of his own. In fact, thanks to the largess of the West Wing and the leadership in Congress, Uncle Sam is running into a bit of a cash squeeze.

With not just billions of dollars – but trillions of dollars being showered on nearly everybody with a hand out and a lobbyist over the past several months – the deficit spending of the federal government is beginning to take a toll on the market for what’s nearly always been considered the super safe place to put cash in tough times: US government bonds.

The first major telltale sign came from the US Treasury as it reported the cashflow statement for the government’s coffers for the first quarter of the year. Traditionally, this is the one time of the year whereby taxpayers like you and I send in the remainder of our taxes for the prior year’s bills from Uncle Sam.

Most years at this time the inflow actually outpaces the outflow and the result is that the federal government runs a surplus – if only for a brief time.

This year, given the work of lobbyists and their targets in the West Wing and Congress, the cash coming in couldn’t meet what was going out, meaning that the government is already running a deficit.

The result is that the US Treasury has to peddle more and more bonds out to the market to borrow money to make up for the deficit even earlier in the year. This surge in supply is now moving the market for US Treasuries into the red.

So far, if we look at the US Treasury market – every part of the market from the short end to the long-term is losing money for investors who just wanted to put cash in a safe haven for a while until the recession or worse begins to ease and better opportunities genuinely develop.

If we look at the 1 to 2 year maturities – the impact is minimal – but still a loss so far this year amounting to some 0.03 percent. Then moving to the 3 to 5 year maturities – the loss rate starts to climb more steeply by some 2.3 percent. The core intermediate 7 to 10 year maturities are delivering a loss of 7.8 percent while the longer term maturities of 10 years out to 30 have really taken some hits resulting in red on investor’s investment statements of nearly 16 percent.

And it’s going to get worse.

Usually in a recession – especially one that should be expected to last and linger longer – US Treasuries are the place to be. Slower growth tends to support less inflation pressure and with less opportunities in other typically riskier assets like stocks – Treasuries fare well – at least earning their coupon rates of yield.

But with so much new borrowing from Uncle Sam – the supply is just overwhelming demand.

This week, the US Treasury auctioned off a new batch of bonds with 7 year maturities. And by some measures it was successful. The number of bids outnumbered the amount offered by a ratio of 2.26 – which was better than the last three auctions of similar bond maturities over the past three months’ average of 2.3. This is being taken as a positive sign that perhaps the fear of debt trouble of Uncle Sam might be overdone.

And sure, there is plenty of chatter about how the US government might lose its vaunted Aaa/AAA credit ratings – especially as rating agencies such as Standard and Poors have cut the outlook for a peer – Britain’s debt – to negative. But while such talk makes for great pitches from the fear mongers of the markets – the reality is that Uncle Sam can indeed keep issuing bonds for a while before the government is in similar trouble as the UK.

Right now our debt to GDP is bad – at nearly 80 percent representing some 11.2 trillion in gross debt. But in the UK, it’s over 100 percent and climbing.

But the real trouble isn’t about default risk by the US government. Rather, it’s about pricing of new bonds and the impact on the existing trillions of dollars’ worth of bonds in the market.

So far this year, the West Wing has driven the amount of traded debt of Uncle Sam to a record of some 6.4 trillion dollars. The deficit for this year is set to be close to 2 trillion, meaning that in percentage terms it will soar – roughly triple last year’s number – to over 13 percent of GDP.

The total amount of Treasury bonds that need to be sold through the government’s fiscal year end in September should be over 3.2 trillion.

Again, while this reads like the stuff of doomsday – if the US government was a corporation, the debt to assets would be a paltry rate as Uncle Sam has multiples of the debt in varied assets ranging from land and other resources to financial and other assets around the nation and the globe.

The real issue is that Treasury prices are likely to suffer as the supply keeps being pushed out.



So, what action do you need to do to keep your portfolio from being further stressed?

First, look at your own direct holdings. Do you have any US government bond funds in your brokerage or trust accounts? If you do – it’s time to take that cash out of them and head elsewhere for a while.

And more likely than not – if you were to look at your current asset mix of your retirement accounts – such as your 401k or 403b or other qualified plans – you probably have a US government bond fund that is a big chunk of your retirement assets. Again – time to sell.

Putting it into cash might sound pretty unappealing with yields so low, but it might well be better than giving up gains over the past 12 months in these funds and then some.

And at the same time that this otherwise traditional port-in-a-storm segment of the market faces its own hurricane – the risky side of the bond market is what you need to buy and continue to own through the next many months.

Yes, emerging market government bonds. These are the bonds that you’ve been told are the risky part of the market. But at the same time – these are the bonds of countries that have lots of cash on hand and stockpiles of reserves on hand. Nations such as the leaders in Asia and Latin America.

These are exactly what’s inside my five core bond funds that are the bedrock of the stocks that pay you to own them.

So, while you dump your supposedly safe US Treasuries – buy the AllianceBernstein Global High Yield (NYSE: AWF). Buy the Templeton Emerging Markets (NYSE: TEI). Buy the Western Assets Emerging Markets (NYSE: EFL). Collectively these three alone are generating yields right now of nearly 9 percent while continuing to perform with a year to date average return of 31 percent which is an annual rate of return of nearly 100 percent.