Will Freezing Subprime Mortgage Rates Help?

I’m skeptical that freezing subprime mortgage rates is the answer to our subprime mortgage mess.

But freezing mortgage rates is exactly what the government and financial institutions are about to do, according to this front page article ($) in today’s Wall Street Journal. Here’s some of the highlights from the article:

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

Many subprime loans carry a low “teaser” interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower’s payment by several hundred dollars a month.

Who will be able to get “help?”

Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups:

1. those who can continue to make their payments even if rates rise,
2. those who can’t afford their mortgages even if rates stay steady,
3. and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates.

Only the third group would be eligible for help.

I wonder how many borrowers are in the second group? Also, this “fix” seems to be temporary in that the teaser rates will only be left unchanged for up to 7 more years. What happens after that? Do we care? I think eventually we’re gonna face a reckoning. Until then, it’s on with the bandaid approach.

The Real Key to Acheiving Your Goals

Dreams (also known as wishes) are often vague, even pie-in-the-sky desires; they need not be realistic, or specific. Common examples might inlcude “I want to retire rich” or “I wish I looked like Jessica Alba.”

Many dreams never become reality because they aren’t true desires. I might dream of winning the lottery on occassion, but that’s not a serious objective in my life. There’s nothing wrong with having dreams, but if your true desires never make the transition from dreams to goals then they can become frustrating regrets.

Goals are more Specific than dreams. To qualify as a SMART goal, your dream should also be measurable, attainable, realistic, and timely. Setting goals with all of these characteristics almost ensures you’ll reach them if you put your plan in action and stick to it.

Specific & Measurable: “I want to have $1,000,000 by the time I retire” and “I want to lose 20 pounds” are closer to goals than dreams because they are specific and measurable objectives.

Attainable & Timely: To really make them goals you have to outline specific steps that will enable you to attain them, and you should have a deadline. Our examples would become “I will accumulate $1,000,000 by the time I turn 65 by saving $1000 each month” and “I will lose 20 pounds in six months by jogging for 30 minutes 4 days a week.”

Realistic: Of course, if your goals aren’t realistic (because, say, you’re 63 with nothing saved and you earn $50,000 a year), then they aren’t really goals at all.

It’s easy to turn your dreams into goals on paper. But the real key to acheiving those goals–and being satisfied when you do–is setting goals that reflect your true values. That may sound cheesy, but it’s especially true when it comes to financial goals.

If you pick some arbitrary net worth target or aim to accumulate expensive homes and cars based on someone else’s expectations, not only might you find it difficult to muster the motivation and discipline to get there, but you’re very unlikely to feel fulfilled when you arrive. Linking your financial goals to your values (education, family, independence, etc.) gives you the energy, encouragement, and motivation you need to work towards your goals. And you might even end up happy when you reach them.

More from Meg at The World of Wealth

Question of the Day – Paying for College

From Some Colleges Cut, Eliminate Student Debt ($) in today’s Wall Street Journal comes this question of the day:

Should there be a minimum payout requirement for colleges and university endowments?

The article gives an example:

Amherst College, for instance, spent 4.6% of its $1.34 billion endowment in the fiscal year ended June 30, 2006. That is the average that colleges spent that year, according to a study by the National Association of College and University Business Officers. Still, Amherst’s endowment rose 15.8% in market value in that year compared with the previous year.

Personally, I think the payout should be based on the endowment’s rate of return. Of course, the problem with this is it would make it very difficult to plan expenditures since some years the endowmenet will grow significantly and other years it might actually lose money. I do not think colleges are paying out enough based on the size of some endowments. Harvard now has a $34.9 billion endowment fund (the fund grew 23% for the fiscal year ending June 30, 2007).

According to the article mentioned in the preceding paragraph, Harvard spends around 5% of its endowment each year, while the endowment has grown around 15% per year over the last 10 years. I understand that endowments must be managed for the future, but it does seem to me that colleges could be a little less stingy. Of course, this is just my opinion.

NeatReceipts is Giving Away $1,000 Each Week Until Christmas!

I just received an email from a PR person for NeatReceipts asking me to mention a promotion they are running. Some of you may remember the NeatReceipts giveaway I held on several months ago. Anyway, each week between now and Christmas, NeatReceipts is going to give away $1,000 to one lucky winner. Here’s the details of the contest taken directly from their website (sorry, I’m lazy):

NEAT Receipts is giving away $1000 each week leading up to Christmas. And we want YOU to win!

Here’s how it works:

Just send us your receipts. Each receipt you send is one entry in the sweepstakes!

You can scan your receipts and send them to us in an email, or mail originals or photocopies. If mailing, you must write your name, daytime phone number, and email address on the back of each receipt to qualify. If emailing, please include your contact information in the body of the email.

Send receipts to receipts@neatreceipts.com or mail them to:

NEAT Receipts
ATTN: Holiday Contest
3401 Market Street, Suite 120
Philadelphia, PA 19104

For complete contest rules, please click here.

A new winner will be selected each Friday between November 30th and December 28th, 2007. Winners will be announced each week on our blog at www.neatreceipts.com/blog and will be contacted directly about their $1000 prize.

So put those receipts to good use and enter for your chance to win!

And this holiday season, deck the halls… with receipts!

Good luck!

Total Market Index vs. Sector Investing

Take a look at the graphic below, which is the sector allocation of the iShares DJ Total Market Index Fund (IYY):

Notice anything significant about that allocation? I’ll give you a hint: it’s the fact that over 17% of the fund is allocated to the financial sector. Unfortunately, financial stocks have been hammered this year. It shows in the performance of IYY, which is up around 4.97% YTD at the time of this writing.

That’s why I prefer to invest equal amounts in the ten sector funds that make up the total market index. As the table below shows, it’s impossible to know which sectors are going to perform the best from one year to another:

Dow Jones Total Market Index Sector Total Returns 1992 - 2006
Click to view in a larger format

The equal allocation strategy would have worked out nicely this year since it limited the exposure to the financial sector to just 10% of the portfolio. Here’s the numbers for 2007:

Please note that this strategy might involve greater transaction costs since you are buying 10 funds instead of just the one fund. So, transaction costs need to be considered before going with this strategy. One way around these transaction costs is to use a low-cost brokerage firm or even a brokerage account that charges a flat fee like FOLIOfn. Still these options are only helpful if you have a decent-sized account.

Another factor to consider is taxation on the buying and selling of the sectors if the portfolio is held in a taxable account. Therefore, it’s probably best to use this sort of strategy inside a tax-sheltered account like an IRA or Roth IRA.

In a follow-up post, I’ll show you how the rebalanced portfolio performed over the years. Stay tuned…

Merrill Lynch is Full of Bull…

Flipping through the WSJ tonight, I came across a full-page ad for Merrill Lynch (page A7 in the paper if you’re interested). The ad says this:

In 1915, Charlie Merrill said,

“The interests of our clients always come first.”

Today we make the same



The interests of our clients always come first.

Then, further down the page is this little paragraph:

In our 93-year history we have never lost our true focus that our founder put so succinctly. Our commitment is why our clients have entrusted us with nearly $2 trillion in assets. It’s why more and more people are achieving the life they want to live through their partnership with a Merrill Lynch Financial Advisor. It’s why we are bullish of Merrill Lynch.

Funny how they forgot about the $100 million fine they had to pay in 2002:

Merrill Lynch (NYSE:MER) will pay a $100 million US fine to settle allegations that the brokerage’s analysts issued misleading research reports.

It’s important to note that ML never admitted to doing anything wrong. However, it doesn’t take a genius to figure out that they WERE NOT putting their client’s first when they were promoting crap in order to earn underwriting business. That said, I would have a lot more respect for ML if they would have said something like:

“In the past, we haven’t always lived up our founder’s true focus…”

I guess that would be expecting too much.

“Share This” Feature Installed But Not Working Properly

Okay, I finally got around to installing the “Share This” plugin, which can be seen at the bottom of every post. It’s a cool little tool that will allow you to share any posts that you think are worth sharing (it’s also a great way that you can help me grow my blog).

The only problem is that when I’m on the main page and I click on the icon, the Share This window seems to be hidden behind the previous post as this graphic shows:

Do any of you experts out there know how I can fix this? Any help would be appreciated.