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Economy

If you are a homeowner or have looked at buying a home in the near future, you probably know all about conforming loans. While the limits for these types of loans have remained stagnant for the past decade, steady increases in the housing marking have prompted this ceiling to rise for the first time since 2006. Beginning next year, a wider range of borrowers will now be able to access these types of loans. Rather than being limited to $417,000, conforming loans will now have an increased limit of $424,100 in 2017.

What is a Conforming Loan?

In the United States, mortgage loans are categorized based on whether they do, or do not, conform to the standards set for by Fannie Mae and Freddie Mac. One of these standards is the cost of the home. In order for a mortgage to be considered “conforming” – and be eligible for lower interest rates – it needs to be below the conforming loan limit.

Until this new change was announced for 2017, the conforming loan limit was set at $417,000 for many years. While a jump up to $424,100 isn’t an astronomical difference, it opens the homebuying door to many people who wouldn’t have otherwise been able to qualify for a lower risk, conforming loan.

If you want to buy a home that crosses this conforming limit threshold, your loan is considered non-conforming or jumbo. While these loans are certainly still available, they are considered much riskier to lenders and therefore are harder to obtain. Also, they typically involve higher down payments and a more intense scrutinization of your credit history and/or income. Because of this, they are seen more often with luxury homes, investment properties, or retail spaces.

Conforming loan limits vary by county, as it is relative to the cost of living in that area. The Federal Housing Administration is responsible for setting the national conforming loan limit (which is what will be increased for 2017), but some counties are deemed eve higher cost. As such, they have special higher limits.

In my county, for instance, the conforming loan limit is at the absolute max of $636,150 —  a whopping $212,050 above the standard national limit. Then again, the cost of living where I live is astronomical (Washington, DC area) and home prices stay high, so it makes sense that certain counties are able to get higher loans. If you want to check the conforming loan limits in your own county, Bankrate has a great chart that you can view.

conforming-map

What Does the Increased Limit Mean for Me?

If you are looking at buying a home that was toeing the $420,000 range, this increase may mean the difference between a basic loan and a jumbo loan for you. That equates to a lower down payment, greater chance of approval, and less headache.

Planning to buy your home with a VA loan? You would be obligated to purchase within the conforming limits of your county. A jumbo loan isn’t even an option with these (and other) government-backed mortgages, so the increase may open a few extra doors while finding the home of your dreams.

Why the Increase?

It’s a great indicator of the health and growth of our country’s housing market, that the limit is rising. After the US housing crash in 2007-2008, home costs are on the rise and expected to continue to grow. This is great news for our economy and for anyone whose money is invested in real estate, whether that be their home, rental properties, REITs, etc.

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While the cost of your home isn’t the only limiting factor between your mortgage being “conforming” or “non-conforming,” it’s a big part of it. Non-conforming, or jumbo, mortgages are harder to obtain and often involve more stringent credit/income guidelines, an intense application process, and higher down payments.

If you’re looking at a government-backed mortgage of any kind, you will need to stay within the conforming mortgage loan limits set forth by the FHA. Beginning in 2017, you’ll get a little extra wiggle room. Be sure to check for the actual limit in your county, especially if you live in a high cost area, and happy buying!

Have you ever had to walk away from a dream home because it would have meant a non-conforming loan?

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After a lull in the price of a barrel, we are seeing the cost of oil begin to once again increase. With it comes increased revenue and, in turn, money being pumped into both the stock market and the economy. So, is this good news for the average person? Well, the immediate answer is no, probably not.

It’s All Part of the Plan

Just a few weeks ago, the Organization of the Petroleum Exporting Countries (OPEC) — and even some countries who are not members of OPEC —  was able to create an agreement that reaches far beyond what many economists thought they could accomplish.  The goal? To reduce the supply of oil around the globe by at least 1.2 million barrels a day. Assuming the demand for oil remains unchanged (at least initially), the reduced supply will create a rise in price. This will, in turn, jump-start the oil industry.

As the price of oil continues to rise, it’s suspected that some of the countries involved will jump ship on the agreement. They may see the profits in front of them and begin pumping out more barrels than initially agree. So far, though, everyone is sticking to the arrangement and the price of oil has consistently risen since the start of the month.

No commodity is more discussed in the world of finance than oil. No commodity has more of an impact on your day-to-day personal finances than oil. Turn on any market-driven television channel, and I’m willing to wager that within 10 minutes, the analyst will have brought up oil at least five times. It’s a true driving force behind the global economy, and its shift in price can have drastic changes on you and your family.

Some economists are extremely bullish on oil predictions, saying it will reach $75/barrel before the end of the year. However, even the bears don’t see oil going anywhere but up (albeit slowly) for the next few months.

Now that the price of oil has stabilized and is steadily rising, is this good for your wallet?  Your future?

The Bad News

When the price of oil goes up, it affects the American buying consumer primarily in three negative ways:

The Price of Gasoline Rises – According to AAA, this week’s average price of unleaded regular gas is $2.21 per gallon.  This time last year, that price was $2.02. At its lowest point this year, the price was $1.62.  If you’re someone who takes an hour round-trip commute to work or drives the kids to football practice in the minivan, you will notice more money coming out of your wallet when you fill the tank.

Average Americans fill up w/ roughly 700 gallons of gas per vehicle, per year. Because of this, even a small increase of 25 cents per gallon will put you out an extra $200 or so per vehicle. You can mitigate this loss by owning a cashback credit card (some of which offer up to 5% rewards on gas purchases). Even after saving a little bit more there, though, rising gas prices are an inevitability of higher oil prices.

Price of Travel and Other Goods Rises – When the cost of gasoline goes up, the cost of goods also goes up. This is to coincide with businesses having to pay more money to get their goods to them.  And of course, that cost is passed on to you, the American consumer.

For example, a round-trip flight from LA to Chicago may be $110 today, but closer to $120 in two months when oil goes up another $5.  Truckers moving products across the country, grocery stores taking in daily shipments of produce… there is no shortage of consumer goods affected by a higher cost for oil.

Price of Heating Oil Rises – This is the one that impacts me the most, but overall impacts the fewest number of consumers.  I live in central Connecticut and every year, I buy between 700 and 800 gallons of oil to heat my home through the winter. My parents, who own a much older (and slightly smaller) home, purchase over 1,300 gallons of oil per winter. When oil prices go up, the price per gallon of heating oil also goes up.  The cost of oil is very similar to the cost of gasoline per gallon.

To combat these prices, I locked in a rate of $1.89 per gallon in July and prepaid for the winter. This should help me avoid having to pay inflated costs when the cold weather hits. However, I also lose the ability to pay lower costs should the price of oil go down.

The Good News

It’s not all bad, though, I promise.  When the price of oil goes up, there is a lot of good that comes from it, too.

Retirement Savings Accounts Increase – Because oil is a heavily traded commodity, it’s likely included in any retirement portfolio you own.  Whether it’s in a commodity mutual fund, or a direct stock ownership of Exxon Mobile, Chesapeake Oil, etc., higher prices in oil mean higher value in your portfolio.  As rising oil prices generally (and I say that loosely) means a stronger economy, it would also likely have an impact on the other investments you’ve made. So if the world is paying more for oil, and the demand for oil remains high, most investments are happy.

The Economy Grows – The oil industry is one of the largest in the world, and higher prices mean higher profits for oil companies.  These profits lead to the hiring of more employees to produce more oil (or expand the business in other ways, still hiring more employees). This means more jobs for not only American citizens but also abroad.

With more people employed, more money is spent inside the US economy. Goods that would not normally be purchased are now starting to move off the shelves.  My example is the most basic way in which the economy will see a positive effect of higher oil prices. However, there are countless other ways to quantify it as well. (For an added example of global wealth, Goldman Sachs provides perspective.)

The Government Doesn’t Get the Extra Revenue – When you see the price of $2.25 for a gallon of gas, you might assume that the money you pay the gas station stays with the gas station.  However, inside of that gallon is heavy taxes collected by both the US government and the state government.  Below is a map that shows just how much money you pay in “tax” when you buy a gallon of gasoline (as of January 2016).  The good news here is that these taxes are not based on a percentage of the gallon, but a flat amount. For example, the US government gets a flat 18.40 cents per gallon, no matter the cost of a barrel.  So, the added revenues earned by the gas station are revenues passed economically, without additional government taxes.

gas-tax-map

You’ll notice that the good news is very macro-themed while the bad news is very micro-themed.  When the cost of goods goes up, there’s just no way around having it immediately and negatively impact the day-to-day spending of the consumer.  So, whether or not the price of oil going up is good or bad for you likely depends on your current financial situation.

If you’re well-to-do with money in the bank, savings for retirement, and are secure in your employment (or your employment is oil pump-related), oil prices going up is a good thing.  It goes a long way to secure a stronger economy in the long-run and boost retirement savings.  However, if you’re currently struggling to make ends meet, and things like retirement seem like a dream versus a real goal, then higher oil only means less spending money in the near future. Either way, the rise in oil prices is likely to garner mixed emotions nationwide.

 

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Gallup’s annual “Mood of the Nation” poll sampled 1,018 adults from across the United States earlier this year, and the results show that more Americans say they are worse off financially right now than they were a year ago. 42 percent of the respondents consider themselves to be worse off, 35 percent say they are better off, and 22 percent claim to be in the same financial position.

This sentiment is surprising considering the economy has been continuing to improve and the stock market (measured by the Dow Jones Industrial Average) was up 26.5 percent in 2013, the biggest annual increase in 18 years. Also, the official unemployment rate for December 2013 was 6.7 percent, the lowest rate of unemployment since October 2008, the last month before the economy began seeing the effects of the Great Recession.

Why are people feeling less financially secure about their current situation while the economy, as a whole, has been improving?

Averages don’t tell a complete story.

First, it’s clear that averages don’t apply to everyone. You can’t predict with precision any particular woman’s height when you observe that on average, women in the United States are 5 feet, 4 inches. Americans are in a better financial situation overall, but that doesn’t mean than any particular household is thriving more than last year.

But a survey of a representative sample should show that there is a positive trend.

Self-reporting and questions about feelings are not very accurate.

When the economy is improving but people’s financial lives aren’t, it doesn’t have much to do with averages. If the survey looked at people’s bank accounts and credit card statements, the results would undoubtedly be different than the Gallup poll’s results. This poll is asking people to make a judgment call. It’s a survey that asks about feelings, not about a financial reality. People don’t always know how to accurately report their financial situation.

That doesn’t mean that the survey has little value. Feelings about one’s financial situation are important, because it’s those feelings — not “reality” — that determine the choices people make about the future. It’s possible to have more money in the bank and less credit card debt this year than one had last year, but feel worse about the financial situation.

More knowledge results in more concern.

If you were blissfully unaware of the danger you were in financially last year, and at some point discovered the truth about your financial situation, it’s possible you’re more stressed this year than you were last year about money, despite being in a better position. My concern about my finances increased when I stopped ignoring my bills. The year I began keeping track of my finances, I might have reported feeling worse off financially than I felt the previous year, despite the truth that I was on the road to financial improvement.

Your friends appear to have improved.

One way people determine whether they’re better or worse off financially is by comparing their financial situation with the perception they have of their friends’ financial situations. Studies have shown that income satisfaction isn’t necessarily correlated to certain amounts of income, but the differential in income between a person and his or her friends and colleagues. In other words, a $50,000 income is satisfactory if your friends earn $40,000, but it’s not satisfactory if your friends earn $75,000.

This comparison plays a role in how you judge your financial situation. If your friends appear to have had a much more successful year than you have, you might be inclined to believe and report that you’re worse off financially now than you were the prior year.

And here’s the kicker. Your friends really are richer than you. A new research paper published this year uses the “friendship paradox” to illustrate this. The friendship paradox describes how your friends are more popular than you, because people who have more friends are more likely to also be friends with you. This is described in Slate:

People who have a ton of friends are more likely to be your friend in the first place. They have a greater tendency to make friends. People with a lot of friends drive the average number of friends up in tons of other people’s social networks because they are connected to so many other social networks…

It’s similar to going to the gym and feeling like the most out of shape person there. The reason that everyone around you is so in shape is because they’re at the gym all the time—that’s why you’re seeing them. Everyone else is at home relaxing and not getting in shape. You’re looking at a very biased sample of people.

When we compare the finances of our friends, we’re also looking at a biased sample of people. And when you see the wealth of your friends (and its growth over the past year) outshine your own, you’re more likely to feel bad about your financial situation and report that negative feeling in a survey.

The media affects your perception.

I saw The Wolf of Wall Street in a movie theater a few weeks ago. The film focused on a stock broker who committed crimes, stole investors’ money, lived a lavish lifestyle, and didn’t really get in that much trouble for his misdeeds. Much of the movie focused on his lavish lifestyle without too much criticism. Some will see the film as a glamorization of a lifestyle of excess, some will see it a a condemnation, but I think it was more successful as the former.

For all the criticism of the “one percent” in American culture over the past few years, we are still fascinated by the lifestyles of the rich and famous, as we see through films and television. While more of the middle class struggles, the more we look to the media to help us escape through fantasies about the financial life that will almost always be out of reach. More programs prey on the public’s desire to see stories about rich people, whether they’re stories of success or failure.

Either way, the proliferation of showcases of wealth in the media has an effect on the way we view our own lives, and this might also play a role in our perception of financial progress. That is, the more we see people flaunt their wealth in the media, the worse we feel about ourselves.

Do you feel worse off financially now than last year?

Here’s the question the Gallup organization asked in its survey:

Next, we are interested in how people’s financial situation might have changed. Would you say that you are financially better off now than you were a year ago, or are you financially worse off now?

I am financially worse off now. Technically, that may not be the case. I just paid a large tax bill, and my January balance sheet suffered because of that. But this is a tax bill I knew — or should have known — was coming, so my wealth hasn’t really changed. In fact, I’ve earned more income than I’ve spent over the last year, so my financially situation should have improved.

How would you answer this question?

Photo: Flickr/Gamma Man

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I would have thought that all the shenanigans within the financial industry ended when regulators began looking into causes of the Great Recession. Today, the SEC announced that JPMorgan Chase is settling the charges that lying to investors was part of the method of operation for the company as late as the first quarter of 2012.

The company is settling for a penalty of $200 million, but this amount is added to recently settlements with other regulators and agencies for a total of $900 million.

JPMorgan Chase’s behavior that attracted SEC scrutiny

The SEC charges relate to a specific incident in March 2012. One of the divisions of JPMorgan Chase managed a portfolio designed to “hedge against adverse credit events.” In other words, if companies were to default on their own bonds on a large scale, this investment would increase in value. With a broad view, hedging is an important financial strategy, and every company should find a way to hedge against downward trends.

When you hedge, your performance should move in opposition to whatever forces you’re hedging against. Everyone else’s good news could be this portfolio’s bad news, and that’s precisely the case in the first quarter of 2012. At the end of March 2012, the stock market had just completed its best performing quarter since 1998. Meanwhile, the credit hedging portfolio at JPMorgan Chase started losing a lot of money.

According to the SEC, the traders involved with this portfolio decided to change how they were calculating the losses they were reporting to management. Previously, the traders would choose a price for each investment within the portfolio using a set of parameters that was understood and accepted. The price reported would simply be the mid-point within the spread between the bid and ask prices for each investment — a nice compromise. But when those prices reflected significant losses on a daily basis, a senior trader instructed a junior trader to stop reporting losses. So the junior trader came up with a new strategy.

The junior trader chose to report the most favorable price — the price that reflected the smallest loss — even if that price was outside of the spread. Using this pricing scheme to the company’s advantage when filing its quarter-ending financials with regulators and investors, JPMorgan reported a loss of only $138 million in that portfolio. The company later restated its financials, admitting it found fault in the calculation at the time, and the loss climbed by an additional $660 million.

An independent review later found that there would be an increase in loss of over $1 billion if the investments had been marked independently. The SEC further alleges that JPMorgan Chase lacked the communication and controls necessary to keep upper management aware of the fraud that had been occurring at the trader level. But you can’t put full blame on one or two rogue traders.

Blame the traders, blame the management, or blame the system?

Quarterly results can kill or crown companies. Wall Street puts pressure on many publicly-traded companies — especially those that operate on Wall Street — to produce outstanding results in the short-term. When the stock market as a whole is providing fantastic results, reporting one division with substantial losses is a surefire way to draw negative attention. People can get fired for bad results. Derivatives traders, who earn a substantial income and might use that income to live a life with their families one might not considered frugal, have a lot to lose.

Like Walter White, they might justify harmful behavior by wanting to provide for their family as much as possible. Their jobs are on the line every quarter; they want to be successful to protect themselves. If they can’t be successful, they want to appear successful.

When the hedge works in the expected direction, that is, when the underlying markets perform poorly and the hedging portfolio goes up in value, the derivatives traders are heralded as heroes. But if the derivatives continue to do their jobs as investments, the will be a financial sinkhole when the underlying markets improve. When this reality combines with the pressure to outperform all the time, there can be some temptation to adjust the numbers to be as favorable as possible to save one’s own job.

It’s this short-term, departmentalized culture that is a danger to companies in the long-term, and it’s a reason why much of Generation Y doesn’t trust Wall Street.

Management put their heads in the sand. They trusted the reported numbers from these traders, but what choice do they have? Management can’t oversee every price of every investment in every portfolio. But internal auditors can.

When I worked for a financial company, profit centers that did not report a high enough return on equity or income each quarter were in danger of being jettisoned from the organization — and this happened several times while I worked there. People’s livelihoods were changed when changes in the market resulted in poor performance in any one department despite the fact that the whole company was in good shape and losses in one area were offset by gains in another. Departmentalization requires every business unit to be profitable on its own, but singularly-focused departments, like an investment team concerned with one specific piece of the market, can’t do that every quarter.

This $200 million penalty may be so low because JPMorgan Chase has already changed its policies and restated its financial reports. But I’m not convinced that any problem has been solved here. Culture will continue to dictate that individuals within a company will willing to bend the rules in order to meet internal and external pressure for performance.

Here is the full SEC order in which the regulator describes the events leading up to the fraud in March 2012 and orders JPMorgan to change its policies and pay the $200 million penalty.

Photo: Flickr/eflon

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5 Keys to Full-Time Employment for Young People

by Luke Landes

The latest economic news from the Department of Labor paints a mediocre picture at best of the employment situation in the United States. It’s still difficult for young people to find full-time jobs. There may be some concern that this lower level of employment is going to be the new norm, and whether American society […]

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Mint.com Tracks Two Million Users to Create Spending Index

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When staff writer Sasha introduced Consumerism Commentary readers to Mint.com in 2007, I began to think about the power of massive consumer financial data. As more people signed up for this online service that connects directly to users’ credit card accounts and bank accounts, Mint.com, or any other similar services, would be able to analyze […]

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Raising the Minimum Wage to $9

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In his State of the Union address to the United States Congress and the television-viewing audience around the world, President Obama called for an increase in the federal minimum wage as a way to reduce poverty. If you believe that business owners have a right to pay whatever the market will bear, minimum wages, whether […]

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Romney Versus Obama: Who Will Be Better for the Economy?

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Take Advantage of Economic Cycles

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For Sale Space 640

This is a guest article by William Cowie. William is committed to helping people let the economy work for them, and writes at Drop Dead Money. A few days ago, Flexo asked a great question: Are you better off now than before the recession? To better understand the implications of the question, take a look […]

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