Sunday, July 26, 2009

Issue Brief on Should You Carry a Mortgage into Retirement?

The Center for Retirement Research at Boston College has posted a new issue brief by Anthony Webb on “Should You Carry a Mortgage into Retirement?”

This Issue in Brief considers whether households should use retirement or non-retirement wealth to pay down their mortgage.  It first shows that it is unlikely that many retired households will be able to earn a return on risk-free investments such as bank certificates of deposit, Treasury bills, and Treasury bonds that will exceed the cost of their mortgage.  Liquidity considerations aside, households holding such assets will generally be better off using them to pay down their mortgage.  It then considers and (for most households) rejects the argument that households should retain their mortgage because they can earn a higher expected return in stocks and other risky assets.  It concludes with practical advice for most households.

The author concludes the following:

[The] analysis indicates that retired households are, in theory, better off repaying their mortgage. In addition to this theoretical conclusion, there is also a very practical argument against borrowing to invest. If a household with a mortgage mismanages its investments, or over-estimates the rate at which it can decumulate those investments, it risks losing the house, its only remaining asset.

One argument that is sometimes cited in favor of not repaying the mortgage is that retaining a mortgage increases the household’s liquidity, and enables it to better cope with sudden unexpected expenses. But households that retain a mortgage need to consider what they would do if the bad event actually happened – i.e., how they would maintain their mortgage payments once their financial assets had been spent.

Read more.

Monday, July 20, 2009

New CRS Report on Defined Contribution Plans

Defined contribution retirement plans have increasingly replaced defined benefit plans. Patrick Purcell and John J. Topoleski report on the most recent growth of defined contribution plans.

401(k) Plans and Retirement Savings: Issues for Congress

Patrick Purcell
Specialist in Income Security

John J. Topoleski
Analyst in Income Security

July 14, 2009


Over the past 25 years, defined contribution plans – including 401(k) plans – have become the most prevalent form of employer-sponsored retirement plan in the United States. The majority of assets held in these plans are invested in stocks and stock mutual funds, and the decline in the major stock market indices in 2008 greatly reduced the value of many families’ retirement savings. The effect of stock market volatility on families’ retirement savings is just one issue of concern to Congress with respect to defined contribution retirement plans.

This report describes seven major policy issues with respect to defined contribution plans:

1. Access to employer-sponsored retirement plans In 2007, only 61% of employees in the private sector were offered a retirement plan of any kind at work. Fifty-five percent were offered a DC plan. Only 45% of workers at establishments with fewer than 100 employees were offered a retirement plan of any kind in 2007. Forty-two percent were offered a defined contribution plan.

2. Participation in employer-sponsored plans Between 20% and 25% of workers whose employer offers a defined contribution plan do not participate. Workers under age 35 are less likely than older workers to participate.

3. Contribution rates On average, participants in DC plans contributed 6% of pay to the plan in 2007. The median contribution by household heads who participated in a defined contribution plan in 2007 was $3,360. This was just 22% of the maximum allowable contribution of $15,500.

4. Investment choices At year-end 2007, 78% of all DC plan assets were invested in stocks and stock mutual funds. This ratio varied little by age, indicating that many workers nearing retirement were heavily invested in stocks and risked substantial losses in a market downturn like that in 2008. Investment education and target date funds could help workers make better investment decisions.

5. Fee disclosure Retirement plans contract with service providers to provide investment management, record-keeping, and other services. There can be many service providers, each charging a fee that is ultimately paid by participants in 401(k) plans. The arrangements through which service providers are compensated can be very complicated and fees are often not clearly disclosed.

6. Leakage from retirement savings Pre-retirement withdrawals from retirement accounts are sometimes called “leakages.” Current law represents a compromise between limiting leakages from retirement accounts and allowing people to have access to their retirement funds in times of great need. In general, borrowing from a 401(k) plan poses less risk to retirement security than a withdrawal. Pre-retirement withdrawals can have adverse long-term effects on retirement income.

7. Converting retirement savings into income Retirees face many financial risks, including living longer than they expected, investment losses, inflation, and possible expenses for medical care and long-term care. Annuities can protect retirees from some of these risks, but they have not proved to be popular as a source of retirement income. Developing strategies to help retirees convert assets into income will be a continuing challenge for Congress and other policymakers.



Home Valuation Code of Conduct

Since May 2009, Freddie Mac and Fannie Mae no long purchase mortgages from lenders that do not adhere to the Home Valuation Code of Conduct. The specifics can be found at the Freddie Mac website. Marcie Gaffner at Bankrate.Com provides a summary analysis of the new code.

Check Out Your State’s Life and Health Insurance Guaranty Fund

The National Organization of Life and Health Insurance Guaranty Associations provides links to websites for state guaranty funds. State guaranty funds provide a safety net should an insurer in your state have problems paying policy holders. Life and health insurance companies are regulated primarily at the state level; therefore, protection will differ by state.  The site also provides a link to the law governing the guaranty fund in each state.

Thursday, July 9, 2009

Tax Benefits for Job Seekers

Given the current unemployment rate of about 9.5 percent, it might be time to check up on the tax benefits for job seekers.

IRS Summertime Tax Tip 2009-01

Many taxpayers spend time during the summer months polishing their résumé and attending career fairs. If you are searching for a job this summer, you may be able to deduct some of your expenses on your tax return.

Here are the top six things the IRS wants you to know about deducting costs related to your job search.

  1. In order to deduct job search costs, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.

  2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.

  3. You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers as long as you are looking for a new job in your present occupation.

  4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

  5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.

  6. You cannot deduct job search expenses if you are looking for a job for the first time.

For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on the IRS Web site, or by calling 800-TAX-FORM (800-829-3676).


Is There a Student Debt Crisis?

Erin Dillon and Kevin Carey (Charts You Can Trust, Drowning in Debt: The Emerging Student Loan Crisis) suggest there is a crisis. They provide data in this analysis to support the view that student debt has risen sharply over the last two decades. The largest increase was by students at for-profit institutions, where borrowing increased from 53 percent in 1993 to 92 percent in 2008.

Read more.

Wednesday, July 8, 2009

FBI Issues 2008 Mortgage Fraud Report

From Press Release:

According to the Federal Bureau of Investigation’s 2008 Mortgage Fraud Report, released today, mortgage fraud Suspicious Activity Reports (SARs) referred to law enforcement increased 36 percent to 63,713 during fiscal year (FY) 2008, compared to 46,717 reports in FY 2007. While the total dollar loss attributed to mortgage fraud is unknown, financial institutions reported losses of at least $1.4 billion, an increase of 83.4 percent from FY 2007.

Read more.

Mortgage Fraud Defined

Mortgage fraud is a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan. Mortgage loan fraud is divided into two categories: fraud for property and fraud for profit. Fraud for property/housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation. Although there is no centralized reporting mechanism for mortgage fraud complaints or investigations, numerous regulatory, industry, and law enforcement agencies collaborate to share information used to assess the current fraud climate.

Source: FBI Financial Crimes Section, Finanical Institution Fraud Unit, Mortgage Fraud: A Guide for Investigators, 2003.

Tuesday, July 7, 2009

Study Indicates that Medical Expenses are an Increasing Cause of Bankruptcy

Medical Bankruptcy in the United States, 2007: Results of a National Study David U. Himmelstein, MD, Deborah Thorne, PhD, Elizabeth Warren, JD, Steffie Woolhandler, MD, MPH

From the Abstract

BACKGROUND: Our 2001 study in 5 states found that medical problems contributed to at least 46.2% of
all bankruptcies. Since then, health costs and the numbers of un- and underinsured have increased, and
bankruptcy laws have tightened.
METHODS: We surveyed a random national sample of 2314 bankruptcy filers in 2007, abstracted their court
records, and interviewed 1032 of them. We designated bankruptcies as “medical” based on debtors’ stated
reasons for filing, income loss due to illness, and the magnitude of their medical debts.
RESULTS: Using a conservative definition, 62.1% of all bankruptcies in 2007 were medical; 92% of these
medical debtors had medical debts over $5000, or 10% of pretax family income. The rest met criteria for
medical bankruptcy because they had lost significant income due to illness or mortgaged a home to pay medical
bills. Most medical debtors were well educated, owned homes, and had middle-class occupations. Three
quarters had health insurance. Using identical definitions in 2001 and 2007, the share of bankruptcies attributable
to medical problems rose by 49.6%. In logistic regression analysis controlling for demographic factors,
the odds that a bankruptcy had a medical cause was 2.38-fold higher in 2007 than in 2001.
CONCLUSIONS: Illness and medical bills contribute to a large and increasing share of US bankruptcies.

Read more.

Monday, July 6, 2009

What Happens to Your Debt After Death?

In the context of Michael Jackson’s estate, Javier Lavagnino at Findlaw examines this question.

Read More.

Thursday, July 2, 2009

Consumer Protection in Europe

From Eurostat

Consumers in Europe
The 2009 edition of the Panorama 'Consumers in Europe' presents a comprehensive set of data and related information concerning consumer markets and consumer protection issues within the European Union. The aim of the publication is to bring together the most relevant and useful information for the evaluation and development of consumer policy, not only as a tool for policy-makers,but also for those interested in end-markets and consumer affairs, such as representative organisations, public authorities, or suppliers of goods and services. Much of the data that has been used will feed into the consumer markets scoreboard which has been designed to monitor outcomes in the single market and to make European Union policy in this area more responsive to the expectations and concerns of consumers.

New Criteria for GI Bill Released

From Website

The new program will include coverage of tuition and fees, an improved basic allowance for housing, a $1,000 stipend for books or the opportunity to transfer these benefits to a dependent. Also, service members will not have to pay into the Post 9/11 GI Bill, which was required to receive the Montgomery GI Bill. Individuals who paid the $1,200 for the MGIB are eligible for the Post 9/11 GI Bill and will receive their money back upon depletion of the 36 months of benefits.

Affordable Home Refinance Program Expanded to 125 Percent Loan-to-Value

From FHA

The Federal Housing Finance Agency has authorized Fannie Mae and Freddie Mac to expand the Home Affordable Refinance Program (HARP) to homeowners who are current on their mortgage payments from the present loan-to-value ratio ceiling of 105 to 125 percent. With these expanded refinance opportunities, qualified borrowers whose mortgages are currently owned or guaranteed by Fannie Mae and Freddie Mac will be allowed to refinance those loans according to the terms of the Home Affordable Refinance Program established earlier this year.

See Press Release