Lessons Learned - Avoiding the Next 2008

  • By Nathan Fort
  • 08 Aug, 2017
Economists and financial planners are likely still startling awake in the middle of the night, sheets drenched in sweat, with the nightmare of September 15, 2008 fading back into the recesses of their subconscious.

That was the day Lehman Brothers collapsed under the weight of the bad bets they made on subprime mortgage lenders, resulting in the largest bankruptcy in history.

You may have heard the term subprime mortgage tied to the financial crisis, but what exactly are subprime mortgages, and how did they torpedo the U.S. and ultimately the world economy?

Fannie Mae

To understand what many people believe spurred the 2008 financial crisis, it helps to know about Fannie Mae. The Federal National Mortgage Association (FNMA, or Fannie Mae) was established by the federal government in 1938 as a “secondary market” for mortgages.

Lenders would lend money to people to buy homes, but they also needed funds for other things. In order to promote home ownership the government-established Fannie Mae would purchase the loans from the lending institution, giving the lender liquid capital in exchange for the mortgage revenue Fannie Mae would be receiving from borrowers whose mortgage they now held.

In order for banks to sell their mortgages to Fannie Mae they had to sell mortgages that met Fannie Mae’s standards and follow the lending guidelines established by Fannie Mae.

Subprime Mortgages

If you’ve applied for a loan you likely have at least a basic understanding of how your credit score affects your ability to obtain the loan and the rate at which interest accrues.

People with poor credit are viewed as riskier by lenders based on their past behavior, and if they are approved for a loan they have to endure higher interest rates.

For decades mortgage lenders wouldn’t lend money to people with really bad credit scores. Some viewed this denial of homeownership by lending institutions as unfair and based on factors that discriminated against minorities. In the ‘90s, Franklin Raines, a Clinton appointee heading up Fannie Mae, decided to do something about it.

Fannie Mae began instituting quotas to ensure mortgage lenders were lending to people who in the past would have been denied mortgages based on their inherent risks.

In order to meet these quotas lenders had to loosen their standards for things like credit score, income and down payments. Ultimately a lot of people who probably shouldn’t have been given mortgages got mortgages. These were known as “subprime borrowers.”

Given that Fannie wanted these loans, and was purchasing them from the lenders, mortgage lenders went wild handing out mortgages with terms that we’d scoff at today. Considering Fannie was more than willing to take these risky loans off the lenders’ hands, there was no real reason for them not to lend the money, and lots of incentives to do so.

Fannie Mae and the similarly government-sponsored Freddie Mac ultimately began pooling these subprime mortgages together in groups and selling shares of them like securities. Banks, who at the time were allowed to take their consumer-invested funds and in turn invest those into other markets, bought up a ton of the shares in these subprime mortgage pools.

A plethora of negative economic events happened in rapid succession, from massive job losses to the housing bubble bursting. This ultimately resulted in Fannie, Freddie and subprime lenders drowning in foreclosed homes and a lot of lost money. Banks, who were already struggling with the effects of an unhealthy economic climate, were then hit by the ripple effect of the subprime mortgage debacle. The rest is history.

How to Avoid it in the Future

The financial crisis was much more complex than the oversimplified explanation above, but that’s a basic summation of what occurred. There are some obvious lessons to be learned that can be applied to not only the government and lending but your own life as well.

  • It’s never a good idea to buy something you can’t afford, especially if you’re going into debt to do so. This could be anything from that fancy Tesla you’ve had your eye on to the latest iPhone. Just because you can get something doesn’t necessarily mean you should.
  • Every investment has risk. There is no perfect investment that promises a great rate of return and guaranteed success. That simply doesn’t exist in the world of finance.
  • Credit scores and lending guidelines exist for a reason. Although it may seem unfair from a borrower’s perspective that you don’t qualify for that car loan or mortgage, from a business standpoint it makes sense to protect investors by avoiding undue risk.
  • Demand is not limitless, especially if it’s being artificially generated by irresponsibly easy to obtain credit. For a significant portion of the ‘90s and early 2000s housing prices were skyrocketing. The median home price in 1987 was roughly $100,000. In 2007 it was $250,000. Homebuilders kept building so when the bubble burst in 2007 there was a massive inventory of homes and no one willing or, more often than not, even in the position to buy the home if they wanted.
If you want to make sure you’re minimizing risk with your investments and retirement savings, it can help to have advice from experienced financial professionals who are dedicated to serving your best interests.

At Arbor Mutual Wealth Management, we’re committed to helping our clients grow their retirement nest egg while safeguarding it as much as possible from an uncertain future.

Whether you need help with income planning and managing your IRAs and 401(k)s or you want to update your estate plan or learn about life insurance policies, we have the tools and resources to answer your questions and help you make the decisions that will help you meet your goals. You can speak with an expert today by calling us at (866) 332-1761.

By Nathan Fort 28 Nov, 2017

It can be uncomfortable to plan for a future where you might be limited by old age or illness. However, the chances of such an outcome may be higher than you think. People who are currently 65 years old have nearly a 70 percent chance of needing long-term care at some point in their lives.1

Luckily, you can offset future care costs by a substantial amount if you invest in long-term care insurance.

By Nathan Fort 01 Nov, 2017
Is your estate plan up-to-date? If not, you’re not alone. Several recent surveys have asked Americans of all age groups whether they have an estate plan or will, and the numbers are not confidence inspiring. One survey, performed by Caring.com, reported less than half of their adult respondents had a will or living trust. A USLegalWills.com survey from June 2016 suggests roughly 71% of Americans don’t have an up-to-date will.

Those numbers are slightly better for seniors. The USLegalWills.com survey found roughly half of seniors had an up-to-date will, and the Caring.com survey suggests slightly more than half, 58%, of baby boomers had estate plans in place. The same study asserts a less-worrisome 81% of seniors 72 and older possessed estate planning documents.

People are certainly living longer, which is one of the reasons many Americans put off establishing an estate plan, but the future is notorious for being uncertain. There are no guarantees of longevity for anyone, which is why it’s advisable for every adult to have some form of estate plan in place, whether it’s just a basic will or a complex series of living and revocable trusts.

The big question, from a wealth management professional’s standpoint, is how do you convince the majority of Americans that, regardless of age, having an estate plan is essential? More fundamentally, what is it that’s holding people back from developing an estate plan?

Is it simply that they’ve never thought about it? A lack of motivation? Discomfort with thoughts of mortality? The answer is likely a combination of some or all of these factors.
By Nathan Fort 30 Oct, 2017

No hard-working American wants to lose their entire paycheck as soon as they receive it. Even so, many of us are guilty of crossing the fine line between necessary purchases and splurge buys, sometimes without realizing it. Even if an individual has a solid grasp on their spending habits, their lifestyle choices may be costing them more money than they realize in the long run. If you’re hoping to set aside more of your salary for savings and investments, it may be time to cut costs in your everyday life with these simple tips.

Shop Smarter, Not Harder

One of the largest weekly, biweekly or monthly expenses in most households is grocery shopping. Grocery stores are strategically designed to tempt you into spending more money on items you don’t need, so it’s vital you enter the store with a plan every time you shop.

Start with a meal plan. If you’re stocking up on the household groceries, you’ll need to ensure you get enough food for the period between shopping trips while spending as little as possible. Planning out your meals for the week will help refine your shopping list and prevent you from purchasing unnecessary items. You may also want to plan your meals around your budget. Red meats, for example, are particularly pricey when compared to white meats. The smart spender may choose to take advantage of sales, coupons or bulk packages to save money on future grocery trips.

If you make a quick trip to the store to pick up a few things, avoid grabbing a basket or cart. The extra space could tempt you to grab items you never needed.

The easiest and most cost-cutting way to save money while in the store is to purchase as many generic or store brand items as possible. There’s a cheaper store brand product of similar quality for almost any name brand item you can find.

Reduce Electricity Usage

Staying up long after the sun sets and waking up before sunrise can cost you in electricity. While most people will need to use electricity for lighting, many homeowners and renters end up spending far more money on their electric bills than necessary because they stay awake late into the night. Try to line up your circadian rhythm with the cycle of sunlight to reduce electricity use after dark.

Homeowners can also remove one enormous electricity hog with only a string and some clips. Your clothes dryer, if it’s electric, is one of the largest drains on electricity in the entire home. Save money by doing things the old-fashioned way. Drying your clothes on a clothesline is just as easy as a dryer and can improve the longevity of delicate garments. Dryer heat is extremely damaging for many articles of clothing. Not only will you save money on electricity by opting for a clothesline, but you’ll also save money on clothing costs in the long run!

Grow Your Groceries

If your yard is just a patch of grass or dirt with no real use, it’s time to repurpose it! Cut down on pointless lawn water bills and decrease your grocery bill by growing vegetables in a garden. Gardening is a fun and exciting way to connect with your food and a great hobby for individuals of all ages.

Enjoy a Bright Financial Future with Arbor Mutual Wealth Management

With only a few minor changes to your lifestyle, you can cut your spending and put that extra money toward providing for the future. If you’re interested in building a nest egg for retirement or making your money work for you, you can find help from the experts at Arbor Mutual Wealth Management. Our financial professionals will help you establish your financial goals and create a plan to help you attain them. Contact us online or call (866) 332-1761 to receive a free consultation.

By Nathan Fort 31 Aug, 2017
If you find finances confusing you’re not alone. Millions of Americans struggle with understanding retirement savings and investment vehicles, and for good reason. Many are complicated and seemingly designed to be as confusing as possible.

Some of the most daunting saving options are annuities. What makes them especially confusing is they’re often associated with insurance and sold by insurance carriers, but in essence, it’s an income stream. So what exactly is the deal with annuities?
By Nathan Fort 08 Aug, 2017
Economists and financial planners are likely still startling awake in the middle of the night, sheets drenched in sweat, with the nightmare of September 15, 2008 fading back into the recesses of their subconscious.

That was the day Lehman Brothers collapsed under the weight of the bad bets they made on subprime mortgage lenders, resulting in the largest bankruptcy in history.

You may have heard the term subprime mortgage tied to the financial crisis, but what exactly are subprime mortgages, and how did they torpedo the U.S. and ultimately the world economy?
By Nathan Fort 21 Jun, 2017
You likely hear a lot of conflicting advice about how to manage your retirement savings , especially when it comes to 401(k)s held through an employer. How often should you adjust allocations? Should you try to micromanage it with the limited options you’re given? Should you update it annually, biannually or monthly?

One commonality you’ll find among most sources is an emphasis on the role time plays in your 401(k) strategy. How much longer do you have until your retirement? The old adage that you continue reducing risk as you get closer to retirement is one of those entry-level 401(k) best practices for which there’s generally unanimous support.

This risk reduction can be safely examined through a lens of decades and years. If you start taking advantage of matching funds in your late teens or early 20s you will likely have 50 or more years of 401(k) investments to look forward to, so investing aggressively when you’re young gives you a chance to experience better growth on a smaller amount and take on more risk during a period of your life when you’re not exactly relying on your 401(k) for an immediate income stream. Even if a bear market were to hit a young investor, their 401(k) still has several decades in which to recover.

That being said, if there’s a bear market on the horizon, and at any given time you can hear opposing viewpoints on the likelihood of that, then you may want to consider adjusting your allocations to more defensive positions that are less exposed to the negative repercussions of market pullbacks. Whether or not you do this is dependent on your outlook on the market and whether you think the likelihood of a bear market is becoming an inevitability.

So How Do I Invest My 401(k) More Defensively?

When it comes to equities, or stocks, there’s always inherent risk. The market can fluctuate, scandals within a company can arise and recalls and lawsuits happen, just to name a few potential scenarios that can result in the rapid devaluation of a particular company’s stock. Bonds, on the other hand, are almost universally viewed as safer for a variety of reasons.

1. Bonds are, in essence, a guarantee that the lender will receive face value once the bond has matured.

2. Typical bonds pay a fixed interest which are guaranteed by the issuer and are part of the bond’s terms. This is different than the dividend payments some stock holders receive, which are entirely dependent on the issuing company’s business and management style.

3. From a long-term standpoint the bond market is typically more stable and less volatile than stock markets.

That being said, with little risk comes little reward. Although bonds can be traded and pay out a minimal interest to holders, they don’t have the growth or dividend potential equal to equities.

Some Other Potential Tips to Insulate Your 401(k)

You generally only have so many options when it comes to your 401(k)’s allocations. Keep in mind that small-cap companies have more growth potential, in most cases, than large-cap companies whose big growth days are behind them. But with large-cap companies generally comes more stability and less risk.

International stocks are another potential growth option given the global economic climate, but if there are big pullbacks in Asia, Europe and elsewhere it may be a good idea to divest out of international and move more toward domestic bonds.

If you have the option to invest in index funds you can also consider index funds that are designed to be bear proof. There are certain industries that maintain value and in some cases even grow during a bear market or recession. People, regardless of the economy (or in some cases maybe because of it), will continue drinking alcohol or smoking. They will likewise continue to need health care and other standard services such as electricity, waste disposal, internet and household goods such as toilet paper or toothpaste.
  
If you don’t want to get entirely out of equities but fear a bear market is inevitable, you may want to research various index funds that are designed to act as a hedge by including these types of recession-resistant industries.

Talk to the Local Austin Area Retirement Experts

If you want to learn more about growing your nest egg while protecting it from potential bear markets or pullbacks, Arbor Mutual Wealth Management can help. Our investment and retirement portfolio strategists excel at helping our customers truly understand their options, establish goals and map out a path to a comfortable retirement. Enjoy peace of mind knowing your money is headed in the right direction by calling (866) 332-1761 and scheduling a free retirement checkup!

http://time.com/money/3144708/heres-the-right-way-to-protect-your-401k-from-the-next-big-market-drop... http://time.com/money/4259056/protect-retirement-bear-market/ http://www.401khelpcenter.com/401k_education/allocation.html#.WTBu_evytQI http://www.investopedia.com/articles/retirement/08/401k-info.asp

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