Personal Finance Blog By MoneyRates - March 2009

There's a new idea floating around Washington which will like get a ton of support from assorted bankers, real estate brokers, mortgage lenders and home builders.

The idea is very simple: Give everyone who buys a home a tax credit equal to 10 percent of the purchase price but not more than $15,000.

New Law
It's called H.R. 1245: The Homebuyer Tax Credit Act of 2009 and it's a lobbyist's dream.

In essence, the government would subsidize home purchases made during the year. This would reduce the inventory of unsold homes, spark more construction and hopefully lift local home values.

This all seems to make sense, except that you have to ask a hard question: How many additional homes would be sold?

Sales
The National Association of Realtors reports that we're likely to sell 4.5 million existing homes this year. Imagine that the buyer credit passes and we sell 5.5 million homes -- an extra one million existing home sales.

This sounds pretty good but look at what we have just done:

___ We gave a tax credit to 5.5 million buyers, not just the extra one million purchasers who came into the market. In this example the real cost for each additional sale is a subsidy for an additional 4.5 houses. In effect, the real cost to the government per additional house could be as much as 55 percent of the purchase price.

___ We haven't helped the people facing foreclosure, the people who bought in 2009 or the people who are simply paying their mortgage and staying put.

___ We've probably ticked off a lot of people who have lost their jobs and can't buy.

I was listening to the radio and the guest being interviewed was a widely quoted financial guru. A caller said he had a home, was making his payments and had about 25 percent equity.

His question was this: Could he get help under the latest mortgage assistance plans from the federal government.

Much to my amazement -- okay, much to my shock -- the speaker said go for it.

Huh? Really?

Qualifying
This is nonsense. The plans announced by the Obama Administration during the past few weeks will not help the caller for a very simple reason: He doesn't qualify.

He certainly has not missed a payment and is thus not facing foreclosure. That means the foreclosure rescue part of the program is off limits.

But what about a loan modification, the second part of the program? Nope. No help there.

What The Government Says
"Every potentially eligible borrower who calls or writes in to their servicer in reference to a modification must be screened for hardship," says the government. "This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the payment that is likely to create a financial hardship (payment shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation."

The caller asked a perfectly reasonable question, but the answer was simply wrong. We're not all going to get help under the current mortgage programs -- and we shouldn't.

It was not that long ago that the bluest of the blue chip stocks including financial services giants like AIG, Citigroup, Bank of America, Capital One, Wells Fargo, and American Express were must-have stocks for any portfolio. A blue-chip financial stock meant stability and long-term growth. Even the dividend yields of the blue-chippers would consistently beat bank deposit rates. Even with the demise of major financial companies like Lehman Brothers and Washington Mutual Bank in the fall, some experts held out hope for the financial sector. That hope seems to have faded completely. Take a look at where these major financial stocks stand compared to a year ago:

American International Group (AIG) trading at 0.36 which is -99.3% from the stock's 52-week high

Citigroup (C) trading at 1.01 which is -96.3% from the stock's 52- week high

Bank of America (BAC) trading at 3.22 which is -92.6% from the stock's 52-week high

Capital One Financial (COF) trading at 8.74 which is -86.2% from the stock's 52-week high

Wells Fargo & Company (WFC) trading at 8.24 which is -81.6% from the stock's 52-week high

American Express Company (AXP) trading at 10.41 which is -80.2% from the stock's 52-week high

A year ago you could find the highest rates on bank savings accounts listed at MoneyRates.com paying rates of 5.00% and better. While that is a fantastic return in comparision to the financial stocks listed above, it also beats all the Lipper Indexes for stocks and bonds for the last year. Simply said, bank savings accounts were one of the best places to have placed your money for the last year.

Financial advisors can offer many investment choices and set-up complex blended portfolios. But they can't offer the safety of bank deposits, United States Treasury products, and some money funds which have the full backing of the United State government. If you are one tired of the volatility in the stock and bond markets, keep checking MoneyRates.com to track the banks offering the best rates on money market accounts, savings accounts, checking accounts and to find the highest CD rates. A 3% rate never sounded so good.

It used to be that there was a difference between investments with taxable dividends and those which were not taxable. If your tax bracket was high enough, tax-exempt investments made real financial sense.

For instance, back in the 1950s and 1960s the federal income tax rate was as high as 91 percent for earnings over $400,000. In that situation a municipal bond paying 1 percent was a better deal for the upper crust than a taxable bond paying 5 percent. Or 9 percent.

Today the top federal rate is 35 percent for everything over $357,700. These numbers tell us that tax burdens have come down enormously during the past few decades, that we probably could balance the federal budget if we went back to the tax levels of the Eisenhower and Kennedy years, and that tax-exempt bonds are no longer so attractive because the federal tax rate is far lower than it was in the past.

No less important, if you have a federally-insured IRA, certificate of deposit or a federally-insured money market deposit accounts (and not just money market programs) you may have more security at a time when a number of states, counties and communities have both massive deficits and declining revenues. In a way, we live in an era when paying taxes may actually be better than trying to find tax-exempt revenues.

For updated tax rates see the 2010 federal income tax brackets.

Many Americans have shifted their financial focus from investing for retirement to saving and paying down debt. While maintaining an emergency savings fund and paying down high credit card debt should be part of every household’s financial plan, many financial planners are advising their clients not to completely forsake their retirement plans. There may be valid reasons for reducing your monthly contributions to a 401K, profit-sharing plan, or IRA. First, if your company has stopped matching your paycheck contributions to your retirement plan the necessity to max out contributions is diminished. A second strong reason might be sudden economic pressure on your household from job loss or reduced wages which are making ends meet difficult. A third reason is to reduce retirement contributions in order to pay off high interest rate debt quickly. And finally many Americans are piling up cash in money market accounts, savings accounts, and CDs to save for a rainy day, which is an important consideration during economic recession.

Financial planners may not disagree with reducing your retirement contributions for the above reasons if they are temporary adjustments due to financial distress and if monthly contributions of some sort are still being made to your account. What will get your financial planner very agitated is either giving up on the stock market completely or cashing in your retirement funds early without exhausting every conceivable option for funds. Selling stocks and mutual funds when the market is down over 50% from where it stood less than two years ago certainly goes against the old adage, “Buy Low, Sell High.” But it also does not allow long-time investors to take advantage of dollar-cost-averaging in their retirement accounts. Americans who cash in their retirement accounts and take withdrawals face ordinary income tax and a 10% penalty on their withdrawn funds if they are under the age of 59. When you factor in the income tax, the penalty, and selling at market lows; you can see why financial planners want you to exhaust every other option first before attacking your retirement funds.

So while there are good reasons to temporarily adjust your monthly retirement contributions, make sure your retirement plan is positioned to rebound when the economy rebounds.