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Hindenburg Omen Tripped Again. Does It Foreshadow A Market Crash?

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In the past few days we've had some interesting (and scary!) news, which has sent a lot of investors scrambling and heading for the hills.  The Hindenburg Omen has been tripped!

The Omen, a technical indicator which uses a plethora of data to foreshadow a stock-market crash, was tripped again on Friday, marking the second time since Aug. 12 it has occurred. (It also came close on Thursday, but one of its criteria fell short.)

The latest trigger has prompted the Omen’s creator, Jim Miekka, to exit the market. “I’m taking it seriously and I’m fully out of the market now,” Miekka, a blind mathematician, said in a telephone interview from his home in Surry, Maine. “I would’ve probably stayed in until the beginning of September,” depending on how the indicators varied. “That was my basic plan, until the Hindenburg came along.”

The Omen has been behind every market crash since 1987, but significant stock-market declines have followed only 25% of the time. So there’s a high likelihood that the Omen could be nothing more than a false signal.

So a lot of people are getting wary, and getting out of the market because they believe that the omen is correct and the possibility of another market crash is pretty high.  In fact some are saying that the market could continue on a downward spiral til it reaches 5000!  Sorry to be the bearer of bad news!

What are your thoughts?

Nearly Half Of Homeowners Leave The Making Home Affordable Loan Modification Program

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I recently wrote about the Making Home Affordable Loan Modification program that the Obama administration passed.  The program was put in place to help homeowners to get some help in tough situations  where they were having a hard time making their regular mortgage payments.  If they were able to prove that they needed help and their mortgage was more than 31 percent of their income, the interest rates on their loans could be substantially be reduced, and in some cases principal reduced.

Government Modification Program Effectiveness Questioned

Since the program started over 1.3 million homeowners have enrolled in the program in order to get some help and get their mortgage payments reduced.  The problem is, the program just hasn't been as effective as hoped, and the tide of foreclosures has continued.

Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have fallen out.

The program is intended to help those at risk of foreclosure by lowering their monthly mortgage payments. Friday's report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say.

More than 2.3 million homes have fallen into foreclosure since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year.”The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody's Analytics.

So of the 1.3 million who enrolled in the mortgage modification program, almost 50 percent of the people have fallen out of the program either because they couldn't keep up with their reduced payments, didn't file their paperwork correctly, or some other reason. Many have complained that the program is a complete mess with neither the government or the banks knowing which end is up.

Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork.

The banking industry said borrowers weren't sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

So everyone is blaming everyone else for the problems the program has had. Borrowers blame the banks and the government.  The banks blame the consumers and the government. The government blames them both.  My guess is that the program was ill conceived from the get-go, and it was destined for failure.  At this point only $490 million has been spent out of a potential $75 billion the government has made available to help stem the wave of foreclosures.

Approximately 630,000 people who had tried to get their monthly mortgage payments lowered through the government program have been cut loose through July, according to the Treasury report. That's about 48 percent of the those who had enrolled since March 2009. And it is up from more than 40 percent through June.

Another 421,804, or roughly 32 percent of those who started the program, have received permanent loan modifications and are making their payments on time.

RealtyTrac reported that the number of U.S. homes lost to foreclosure surged in July to 92,858 properties, up 9 percent from June. The pace of repossessions has been increasing and the nation is now on track to having more than 1 million homes lost to foreclosure by the end of the year. That would eclipse the more than 900,000 homes repossessed in 2009, the firm says.

To me it makes sense that only 32 percent of homeowners who entered the program have been able to get permanent modifications.  After all, many of them only entered the program because they didn't have enough income to make payments.  Where is the money going to come from even if the payments are reduced?

What do you think about the Making Home Affordable Loan Modification program? Do you think it was destined to fail?  Have you tried to take part in the program only to get the run around?  Tell us your thoughts on the MHA Modification program in the comments.

Should I Get A 401k Loan Or Do An Early Withdrawal To Help Us Through Tough Times?

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Times are tough in the U.S. and more people than ever are finding themselves in tough situations where they've lost a job and haven't been able to find something new.  Unemployment is hovering around 10%, although true unemployment is probably much higher as some people have just stopped looking.

As people go further without finding something new, many of them are having to find new ways to get money to keep the lights on.  One of those places people are looking is their retirement accounts.  CNN reports that 401k hardship withdrawals and 401k loans are at the highest level in 10 years:

Hardship withdrawals from 401(k) retirement saving plans rose to the highest level in 10 years during the second quarter, Fidelity Investments said on Friday, in the latest sign of a dismal economy.

Fidelity reported that, as of the second quarter, 2.2% of all 401(k) participants had made a hardship withdrawal at some point over the preceding 12 months. That's up from 2% in the prior year, and was the highest level in 10 years.

At the same time, the percentage of 401(k) participants that had an outstanding loan from their account rose to a record high of 22% in the second quarter. The average loan amount was $8,650 at the end of the quarter.

So more and more people are using their 401k accounts as a backup plan to be used when times are tough. But should they?

Early Withdrawals – Things To Consider

So what are some of the things that need to be considered when taking an early withdrawal from your 401k?

  • 10% Early Withdrawal Penalty: When you take money out of your 401k before you turn 59 1/2, your withdrawals will be subject to a 10% penalty unless you meet certain withdrawal criteria. That's a pretty big chunk off the top!
  • State and Federal Taxes: Your early withdrawal will be subject to state and federal taxes which means that after the 10% penalty and taxes your withdrawal could be left with only about 60% of the total before you're done.
  • Short Circuiting Retirement Gains: When you withdraw from your retirement accounts, you'll be foregoing the gains you might have made on that money.

So when it comes down to it, if you take an early withdrawal you'll be losing up to 40% of the money right off the top due to taxes and penalties.  That's a lot of money to give up!

401k Loans – Things To Consider

401k loans are being used now more than ever to pay off debt, pay bills and pay for other wants and needs.

Usually you can borrow up to 50% of your vested account balance or $50,000, whichever is less. You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.

But there are things you need to consider.

  • 401k Loans May Require Repayment Immediately If You Move Jobs Or Are Fired: These are uncertain times, and we never know what might happen tomorrow.  What if you leave or lose your job before the loan is paid back?  You will be obligated to pay it back immediately (although many plans offer a 60-90 day grace period) or suffer the fees and penalties associated with a 401k withdrawal.  As mentioned above there is a 10% penalty, and federal and state taxes are taken out as well.  In this situation you may be better off taking out a loan at a bank to repay the loan – and avoid those penalties.
  • If Your Stocks Are Down, You Can't Regain Losses:  If you withdrew your money when the market was down, you won't be able to regain those losses when the market goes back up.
  • You Pay Interest To Yourself: One positive point about 401k loans is that you're paying interest to yourself, and not a big bank somewhere.

Conclusion

Personally I think that doing a 401k loan, or doing an early withdrawal from your account is hardly ever a good idea.  I think it should only be used as a complete last resort. The downsides – including penalties, short circuiting gains and having to repay the loan immediately if you leave the job (when you can probably least afford it) are just too big.

What do you think about 401k loans? Are they ever a good idea, and would you take one out  – or have you?  Tell us your thoughts in the comments!

Tax Implications Of Strategically Defaulting On Your Underwater Mortgage

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A while back I wrote about how millions of homeowners are finding themselves underwater in their mortgage.  In other words,  they are finding that they owe more on their home than it is currently worth.  It's frustrating to have to pay more on your home than you could get for it if you sold, and many are deciding that their best option might just be to strategically default on their mortgage.  Why keep paying if your home isn't worth what you thought it was?  Why throw good money after bad?

There is a heated debate as to whether strategically defaulting is OK to do morally, but plenty of people are accepting  it as a viable alternative.  For those that decide to go down that road, are they considering all the implications?

Tax Implications Of A Strategic Default

One thing a lot of people don't realize is that if you strategically default on your home mortgage, and the bank forecloses, you may be liable for the taxes on your forgiven debt.

In many states, any part of a mortgage that the bank forgives is reported as taxable income.

In some states, you’re off the tax hook if the bank forecloses on your original mortgage. But you could still be taxed on a home equity loan or a loan you refinanced.You’ve probably heard that the government has temporarily stopped taxing people who lose or give up their homes. That’s the Mortgage Forgiveness Debt Relief Act (otherwise known as “The Don’t Kick ‘Em When They’re Down Act”). But it doesn’t apply to every mortgage. You can be foreclosed and get a tax bill, too.

The majority of people going through foreclosure have no choice. They can’t afford the payments any more.  But a growing number of homeowners are choosing “strategic default.” They’re not broke. They owe more than the house is worth and decide to stop throwing good money after bad.  Many considerations come into the default decision — moral, reputational, financial, credit-score, and what the kids will think. Taxes matter, too

So if you default on your mortgage loan, even though you're able to pay the bank – and the bank forgives part of your loan, you could be getting a big tax bill.

You’re generally taxed on debt that a lender forgives. For example, say that you default on a $350,000 first-mortgage loan. The bank sells the property for $250,000. If the bank has the right to pursue you for the remaining $100,000 but doesn’t, that “forgiven” amount is taxed to you. States with these rules are called “recourse” states.

The Debt Relief law wipes out the taxes due, but only for certain types of loans.

In some states — called “non-recourse” states — a bank that forecloses generally does not have the right to chase you for additional money. As a result, the unpaid debt ($100,000, in this example) is not taxed as income. You get away scot free.

So which states are non-recourse states where you'll be off the hook for taxes?

Non-Recourse States: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, Washington.

In other states you may be liable for taxes due if the bank forgives part of your principle balance after selling your property.

Other situations in which you won't be liable for taxes due include when you are bankrupt or insolvent.

Tax Forgiveness On Forgiven Debt Doesn't Cover All Loans

There is an asterisk on the tax free status for the non-recourse states.  The tax free laws only cover three types of loans:

  • The original mortgage from when you bought or built the home
  • The balance of the original mortgage at the time you refinanced.
  • A cash-out refinancing or home equity loan when the proceeds were used to improve the home.

If you borrowed against your home in order to pay off a credit card, or to buy a car for example, you will be liable for taxes on those amounts.

If you do have part of your mortgage balance forgiven, the bank will issue you a 1099 for taxable income, which you can use when filing your taxes.

What do you think about the tax implications of strategically defaulting on your mortgage?  Do you think most people consider that they may have to pay taxes on the forgiven amount of debt?  Tell us your thoughts in the comments!

PerkStreet Financial Free Rewards Checking – Review: A Cash Back Checking Account? That’s Right!

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Over the past couple of years we've seen the rates on online savings accounts drop like a rock.  Most online savings accounts are currently hovering around 1-1.3% in interest earned on your money.  In other words it isn't exactly an amazing return on your money.

In addition to the online savings accounts souring,  rewards credit cards have been seeing their accounts drop benefits, add annual fees and in general become less of a good deal.   I know my rewards credit card terms have changed for the worse.

It isn't a great environment if you're actually trying to get something extra for your money.   Until now.

Perkstreet Financial has burst onto the scene with a new concept that has a lot of folks pretty excited.  It's a rewards checking account!  You get to earn money on the money that you spend from your account – up to 2%!

Perkstreet Financial Free Rewards Checking

For the most part online and bricks and mortar checking accounts haven't been anything to get excited about. You get an account, and you use it to pay your bills. While you may not be paying any account fees, you're also not getting much out of the account other than a place to put your money before you send it out to all your regular monthly bills and savings goals.  Now Perkstreet is turning things around by offering people cash back just for spending their own money.   How much money you get back really depends on a couple of factors.

  • How much you spend: The more you spend, the more you get back!
  • How much you keep in your account:  If you keep $5000 or more in your account at all times, you'll be able to earn 2% cash back on all your purchases.  While that might not sound like that much at first glance, if you consider it, it really does end up being quite a bit of money. For example, if you spend $2500 in a normal month on all your bills, you could start paying them via your Perkstreet Visa, and get back $50 in cash if you have a $5000 balance.  Even without a high balance you'd make $25 back!  That's $300-600 back in a year!

With cash back rewards that good on a checking account, what it really means is that my credit card account is becoming obsolete.  I pay cash for everything anyway, so why would I keep the credit card account, and it's associated risks when I can get the same benefits from my checking account?

Benefits Of The Perkstreet Checking Account

The account at Perkstreet really is chocked full of benefits. Some of them include:

  • No Cap On the Amount of Perks You Can Earn
  • Nation’s Largest Surcharge-Free ATM Network
  • No Minimum Balance Requirement
  • No Monthly Fees When You Use Your Account
  • Sign-Up In Just 5 Minutes
  • Free Online Banking and Bill Pay
  • No Need to Worry, Deposits are FDIC Insured Up to $250,000 and Protected from Fraud by the Visa Zero Liability Policy
  • PerkStreet Financial? Visa® Debit Card gives you 2% cash back
  • You can get 5% cash back on certain categories and certain merchants!
  • Super fast live phone service, 24/7

SignUp For Perkstreet In 5 Minutes

Getting a new account at Perkstreet is quick process that should only take you 5 minutes of your time, according to their site.  You select what type of rewards you want, give identification, review your information, and fund the account via credit or debit card.

What information will you need when you open your account?:

  • Social Security Number
  • Personal information
  • Driver’s license
  • Debit or credit card to make the initial $25 deposit.

Some have stated that when they opened their account they didn't get a hard credit pull on their credit report.  Others have stated that when they opened a “plus” account – with overdraft protection, they DID see a hard credit pull.  I’m not sure if either of these is true, so be forewarned.

Conclusion

When I heard about the Perkstreet Rewards Checking account, I was intrigued. It was a pretty new type of account offering, not one you're seeing yet at many other banks.  Time will tell if it is successful, but if it is, you can be assured that you'll see these account types popping up all over.

Some of the things I like the most about the rewards checking at Perkstreet include the large number of free ATMs you can use when you have the account (over 37,000 of them in the STARsf® surcharge-free network), no monthly fees as long as you use the account, free bill pay, and the protection of FDIC insurance of up to $250,000 on your account. So you don’t have to worry about your money being safe.

Best of all, the account will pay you to spend your own money, without having to use a credit card!

One of the few downsides I can see is that you have to keep a relatively high $5000 balance to earn the highest cash back rate (2%), but even at the lower rate, it's still a pretty good deal.

If you want a rewards account, but don't like dancing with the credit card devils, Perkstreet is a great option to consider.  Not only will you be paying cash for the things you buy, but you'll be earning money back on all your purchases!

Want to sign up now?  Check it out at the link below:

Sign Up For Perkstreet Financial Rewards Checking

Stop Acting Rich: Don’t Allow Displays Of Wealth To Substitute For Real Wealth

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We all have friends that love to buy the finer things in life. They drive nice cars, live in a big house, and when they dine out they always go to the expensive places with the trendy eats.   In short, they live a high dollar lifestyle where they love to display their wealth for everyone around them to see.

The thing is, quite often those same people who are living the high-consumption lifestyle are the same ones who are struggling to get by with huge mortgages, large car payments and home equity loans.  Even if they've got relatively high incomes far too often they live beyond their means.

Time To Stop Acting Rich

In his book “Stop Acting Rich“, Thomas J. Stanley talks about how far too often we are substituting a life of actual wealth creation, for one where wealth is only an illusion.

Ours is a culture of hyperconsumerism.  Not only can and do we buy nearly anything (except for the truly outrageously expensive), but we seem to have come to believe that we can and should have it all and that who we are is dependent on the ability to live in the right neighborhoods, with appropriately sized homes filled with brand-name appliances, with prestige cars parked in the driveway with expensive golf bags and clubs in the trunk and so on. And so we spend.

We spend to excess, and attempt to display a persona to those around us that says “I'm successful”.  The problem is, most of the world's millionaires aren't living a high consumption lifestyle with all the expensive trappings. In fact, most of them have become wealthy because they are able to live below their means, and live less “flashy” lives.

You can act rich or actually become rich.  Few of us will ever be able to do both, and we certainly won't bet rich by acting the part before we have the financial resources with which to pay for la dolce vita.

We live in a time when it has never been easier to act rich than to actually become rich, even with the devastation of the financial crisis.  At the end of the day, not only are we bad actors because it is simply impossible for us to keep up with the glittering rich (if we buy one expensive, prestige car, they buy 20), but we are terribly misguided and ill informed about how millionaires really spend and what they actually buy.   Instead of focusing on millionaires generally, we are enamored with the few glitteringly rich people.

Know first who you are, then adorn yourself accordingly – Euripides

We fool ourselves, and think that we can emulate the glittering rich lifestyles of the rich and famous – before we have the income to match – and afford the lifestyle.

If we truly want to be wealthy, we have to life below our means, and live a lifestyle that allows us to build wealth.

How Do Millionaires Spend?

When Stanley actually surveyed millionaires in his studies he found that they as a group were much more frugal than most people might think.

Let's look at how real millionaires spend their money and what they pay for goods and services.  Real millionaires pay about $16 for a haircut at a traditional barbershop…  Only 5.7 percent of millionaires surveyed nationally paid $1000 or more for their most recently acquired suit… The watch he wears every day was purchased at a Wal-Mart store for $15..

Real millionaires don't mind spending money, but they also know about buying things that give you good value.  They don't splurge on things they don't want or need, and instead they save their money, invest, save and give.  They also find greater pleasure in enjoying things that don't cost money. Spending time with family, enjoying the outdoors, and working hard at their chosen profession.

Conclusion

So what's the conclusion that we can draw from how real millionaires live?   That the truly wealthy in this country aren't the ones we see around us driving the expensive cars, or living in the 10,000 square foot homes. Those people are more than likely over-extended and in a hole. The truly wealthy are those that don't have to flaunt it. They drive cars that have good value, and homes that are in the 300,000 dollar range.  They became wealthy by living frugally, saving and investing the income that they created.  They're the ones I hope to emulate as I go on my own journey towards wealth.

Do you know people who live beyond their means and appear wealthy on the surface?  Do you know someone who is truly wealthy?  What do you think about the ideas of appearing wealthy vs. actually being wealthy?  Tell us your thoughts in the comments!