November 22, 2011

Amortization

Commentary by Joseph Warren

The word amortization comes from the Latin word admortire, which means, “to kill.”  Given the state of the housing and debt markets these days the derivation couldn’t be more fitting.   Regardless of the origin, understanding how an amortization schedule is calculated and the influence of such a calculation on things like the housing market could not be timelier. 

I’m not going to go through the entire amortization formula as it would take most of this piece.  But know that the interest rate, the number of payment periods and the principal balance are the variables that calculate the monthly payment.  (Visit our mortgage calculator at http://warcap.com/services/harmonyloans).  Those variables also dictate the amount of interest vs. principal allocated within each payment: the amortization schedule.  As you might deduce, the larger the number of payments (there are 360 monthly payments in a 30-year loan) the less principal allocated at the start of the loan.  The nature of this formula and the fact that very few homeowners or mortgage brokers understand the formula is a primary reason for the current state of the housing market in this country. 

Take a 30-year fixed loan for $500,000 initiated in November 2009 at 6%.  The monthly principal and interest payment would be $2,997.  While that is an important number, often mortgage brokers fail to properly explain that such a mortgage obligates the borrower to pay $579,190 in interest over the 30 years of that loan for a total repayment of $1,079,190.  Today a qualified borrower could get a 30-year fixed mortgage for about 4.3%.  While this is a significant rate difference, there is a dirty little secret hidden inside the option to refinance and most in the industry don’t want you to recognize it.

Two years of payments at $2,997 equals $71,928.  But because of the magic of the bank’s amortization formula, the principal balance of this loan after two years is $482,922.  Only $17,078 of $71,928 has gone to paying down the $500,000 borrowed.  Moreover, refinancing into a new 30-year fixed mortgage immediately subjugates the borrower to another 360 monthly payments and a new amortization schedule.  Under this scenario, after four years of payments totaling $129,480, the borrower would have a principal balance of $466,427.  When you add back the $22,000 of closing costs the borrower would have to pay for both loans the total reduction of debt is de minimis.  Here at Warren Capital, we believe this type of scenario should be avoided and we give our clients a much better solution.

Through our alliance with Mortgage Harmony Corp., we are able to offer our clients a unique type of loan that allows the borrower to reset their interest rate after they finance by simply clicking a button on their lender’s Web site.  If interest rates change after the loan closes, which they always do, you now have the ability to take advantage of that new rate without refinancing.  No credit check, no appraisal, no title work, no income or job verification and no new 30 year amortization schedule. 

Our job at Warren Capital is to build and protect our clients’ wealth.  Both asset and liability management are necessary to accomplish our job.  There will be times when asset growth will be limited because of economic circumstances.  During such times, you can be assured that we will use that opportunity to improve the other side of our clients’ ledgers and to make sure they don’t succumb to hidden financial pitfalls.  While this is a unique approach for advisors in our industry, we know it’s the right way to help our clients build their net worth. 

As always, I appreciate the continued trust and confidence.

May 18, 2011

Warren Capital Group is first wealth management firm to introduce the Harmony Loan mortgage that allows consumers to reset their interest rate without refinancing

Commentary by Warren Capital

Washington, D.C. — Shifting incomes and reduced home values in the wake of the housing market downturn and Great Recession caused many borrowers to find themselves trapped in their existing loans — unable to refinance and take advantage of lower interest rates.

A new consumer-friendly mortgage product, the HarmonyLoan, allows borrowers to avoid this trap in the future: The HarmonyLoan allows borrowers to lower their interest rate to market — without ever refinancing their loan again.

Homebuyers can quickly and easily reset their HarmonyLoan by accessing a state-of-the-art, 24/7 web interface. Upon resetting, they have the advantage of an at-market lower interest rate without the cost, hassle and hurdles of a traditional refinance or new mortgage.

Washington, D.C.-based Warren Capital Group is the first wealth management firm in the nation to offer the HarmonyLoan to consumers.

“Properly growing net worth requires managing both the asset and liability sides of a personal balance sheet,” says Joseph Warren, founder and CEO of Warren Capital Group. “While most investment advisors manage their clients’ assets, we are the first to be able to help manage what is often our client’s biggest liability — their home mortgage.”

Warren Capital believes the HarmonyLoan removes the costly inefficiencies of the mortgage process and affords greater economic security to clients.

“By not only being cognizant of their interest rate but also being able to help them reset their rate without any cost when the rates are most attractive, we dramatically reduce our clients’ mortgage liability and increase their homeownership,” Warren says.

Consumers often don’t understand the implications of refinancing.

Each time homeowners refinance, they subject themselves to a new 30 year amortization schedule.  That means that the vast majority of their monthly payment is going toward paying interest rather than paying off the principal they owe.  As a mortgage calculator and amortization chart show, it is not until year 17 of a 30 year loan that more of the monthly payment goes to principal than interest.

The HarmonyLoan allows consumers to get the best mortgage rate available without backsliding on the amortization schedule as occurs with a traditional refinance.

To learn more about the HarmonyLoan™ please contact Warren Capital Group at 888-262-1040 or email jrw@warcap.com. To schedule a press interview with Mr. Warren, please contact Simona Sanders.

Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.

Warren Capital Group
www.warcap.com
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February 01, 2009

A Moment of Truth

Commentary by Joseph Warren

I’ve spent the last two editions of this newsletter writing about how fortunate America is to have the tremendous borrowing capability of the Treasury to help extricate the country from this economic debacle. But as mentioned in December, every entity has its debt limit and it looks like the U.S. Government might be reaching its capacity.

By my estimation, by the end of this year the Treasury will have issued $3.3 trillion of new debt since the start of 2008.This new issuance is larger than the combined net borrowing of the government from the last 27 years. The system is beginning to notice this tremendous sum and, accordingly, treasury rates are rising. From the lows in December, 10-year treasury rates have risen from 2.04% to 2.9%, which marked the worst January for treasury bonds in decades. Across the board, the government’s borrowing costs are rising and there are two clear reasons why.

First of all, it can be easily argued that the majority of government aid to date has been futile at best and there have been many beneficiaries that are far from worthy. One need not look any farther than Bank of America and General Motors for clear examples.

It is important to remember that Bank of America acquired Merrill Lynch late last year. This, of course, occurred after collectively receiving well over $40 billion in taxpayer money. But fortunately for a select few, there was just enough time between the injection and close of theacquisition to issue bonus payments to certain employees. So as you might expect, Merrill accelerated the issuance of $3.6 billion in bonus payments in December just before Bank of America took control. Specifically, the top 696 brokers each received at least $1 million in bonus pay while the top 149 executives split $858 million. To top it all off, this was conducted at the same time Merrill produced a $15.3 billion loss for the quarter. This loss jeopardized Bank of America’s ability to proceed with the acquisition. So, in January the government again stepped in and granted them $20 billion more and $188 billion in asset guarantees. Today, Bank of America stock is $3, down 92% since receiving government money last fall. But to be fair, their competitors are following the same path.

Morgan Stanley, which is acquiring the Smith Barney brokerage force, is set to distribute $3 billion of “retention and performance” bonus payments to the combined brokerage force any day now. Given the investment experience that many clients of these firms have endured, I find the term “performance bonus” not only an oxymoron but appalling. What’s even more disturbing is given all the events that have unfolded and the collapse of so many of these Wall Street firms, the majority of financial advice that emanates from what remains of these companies continues to guide the end client incorrectly. Anyone who has adhered to this “buy and hold” mantra that most brokers and mutual funds consistently endorse is fully aware of how costly thatphilosophy has been. But as mentioned, other recipients of this emergency taxpayer aid have been just as egregious.

Just this month, General Motors submitted a request for another $22 billion to get it through the end of March. This is on top of the $13 billion it received in December. With this type of cash burn rate, it is painfully obvious that this is not a viable company, especially given the fact that auto purchases will continue to diminish for a while. But this is not some new revelation. If you look at GM’s financial reports, you have to go back to 2004 to find a quarter where they actually made a profit. Starting in 2005, the cost of making their products became larger than their sales and the loss has just grown ever since. But these losses have certainly not stopped their barrage of car ads and sporting event sponsorships. Nevertheless, the government came to their aid in December and 45 days after its intervention the stock has dropped another 60% to $2. This leads to the second reason why treasury rates are on the rise.

It is becoming clear to everyone in the world who has an interest or investment in this country that all this government outlay and policy change are not addressing the one underlying problem: Housing prices are going down. Housing is where this all started and where it will end. Whether we like it or not, we too have a limit on our resources and if we keep fumbling around and tossing money at ancillary issues, you can expect our status in the world to continue to diminish and our interest expense to skyrocket. After all, why would anyone continue funding such futility through the purchase of treasuries? And, of course, we are in dire need of treasury purchases to fund these misguided policies. (Are you seeing a pattern here?) But we are where we are. The question is: What are you and I going to do about it?

The fact of the matter is that effecting such change is beyond the willing grasp of most hard working, ethical citizens of this country. Your daily plate is more than full tending to your family and conducting profitable business in this environment in order to bolster the economy while you contribute to the tax pool. (Be certain that the powers that be are fully aware of this. In fact, they are wholeheartedly counting on it.) But let me offer a little solace. While we at Warren Capital have always been extremely focused on understanding evolving policy, we are now going well beyond this and taken it upon ourselves to exhaust every resource available to us to offer some very simple and plausible remedies to the proper policymakers. (Not only does this facilitate better investment positions, but it fulfills a basic level of civic duty.) Inasmuch as I recognize the power and connections of our client base and the others that subscribe to this commentary, I offer these two suggestions if you have any influence:

Stop issuing new housing permits for a while. According to the U.S. Department of Housing and Urban Development, 892,500 housing units were authorized by building permits in 2008. This is ludicrous! Stop building new houses and continue to let the population grow. (The U.S. Census Bureau states that there is a net gain of one person to the U.S. population every 13 seconds.) It won’t take too long to work off the excess inventory. I realize there are implications for builders and contractors. But take those able forces and have them upgraderoad, bridges and schools for a few years. After all, we just allocated a huge sum of money with the most recent stimulus bill.

My second suggestion is to have the government pay down some principle on every first home mortgage in the country in return for a future repayment in the event of sale. So, if a property is sold in the future for a price higher than today, the government will get repaid before the seller receives any money. This has major implications. Monthly mortgage payments will go down as the principle balance will have been reduced, homeowners will have more equity and lenders who extended these loans --primarily the banks who we are propping up anyway -- will receive an injection and can reduce their leverage.

I realize that I will quickly get rebuttals stating how unfair this is to those who don’t own homes. But nothing in this whole mess is fair. Furthermore, new homes buyers will receive a $7,500 tax credit for a purchase, according to the new stimulus package. More importantly, it is commonly understood that the best way to help the most people is to have a growing economy and that will not happen until housing prices stop falling.

From what I see, the influential in my industry and many others industries, federal, state and local leaders, I as a citizen, and perhaps the nation as a whole are at a critical inflection point. We stand here ranting yet apologetic, fearful yet hopeful, angry yet greedy, attentive yet passive and alienated yet surrounded. But despite these contradictions, it’s time to decide whether to affect chance or simply accept it. Because it's not the predicament that defines character: It's the path of extrication that does. So I ask, what will you decide as you face such a moment of truth?

As always, I appreciate your continued trust and confidence.

Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.

October 01, 2008

We're All in This Together

Commentary by Joseph Warren

Anyone who is familiar with Washington, D.C. knows that it if you leave the headquarters of Fannie Mae and take a short downhill stroll from the company’s Wisconsin Avenue headquarters over to Pennsylvania Avenue you pass the White House, the U.S. Treasury Department and Capitol Hill, in that order. This is woefully ironic and incredibly convenient given the events of the past decade.

I hesitate spending too much time looking backwards as solutions to current circumstances are what matter. But let me review a few events from recent history. On Sept. 30, 1999, Fannie Mae caved to political pressure from the White House to expand homeownership to low and moderate income people and launched a pilot program involving 24 banks in 15 markets that eased the credit requirements on mortgages that Fannie would purchase from banks. The program encouraged those banks to extend home mortgages to individuals whose credit was not good enough to qualify for conventional loans and reduced the down payment requirements on such loans. What also happened on Sept. 30, 1999? The Dow Jones Industrial Average closed at 10336. Today, almost 10 years later, the Dow stands at nearly the exact same number of 10325.

If these events don’t seem coincidental to you then I invite you to call my office so we can debate. To me this sequence is all too obvious. An increase in home ownership is a wonderful arrow to have in a political quiver. To accomplish increased home ownership you must allow the less credit worthy access to loans. And who better to provide such accessthan a quasi-government institution that trades publically, but has the intrinsic guarantee of the U.S. government (Fannie Mae). I’ve always argued that being a D.C.-based money manager has its advantages, but as I’ve begun to peel this onion I further convince myself that this is an absolute — understanding how markets function takes both political and economic insight.

Imagine this: Knowing a competitive election is coming in a year, a politically savvy idea is floated to increase homeownership and cite that as an economic success to garner more votes. The flawed concept of maintaining a quasi-government public company not only continues, but its emphasis on and ability to manipulate the capital market is enhanced by its inherent backing by the U.S. government and, henceforth, the U.S. Treasury. The tech bubble bursts and interest rates are cut by 80 percent. Foreign governments, local banks and anyone else mandated to purchase “safe” investments flock to Fannie Mae debt — be it bonds or preferred equity — searching for that last bit of yield beyond treasuries in seemingly risk-free investment. And boy do they flock.

The underlying capital available to Fannie increased tenfold over a decade and, when leveraged, its capabilities come to dictate the mortgage market. Due diligence and lending standards decrease unilaterally as institutions can now sell that debt to Fannie and not keep it on their books. Those less than credit worthy who eagerly seek their first homes are granted loans and builders ramp up production. Over time, interest rates creep back up to previous levels and home supplycomes to outpace demand with overdevelopment. In the end you are left with one behemoth of a company that is providing financing for more than 60 percent of a $46 trillion housing market, which is decreasing in value because of oversupply and higher lending costs. And the net effect, as we can see today, is disastrous. Be that as it may, this is where we stand and hindsight only holds so much value. What’s important to recognize in this pessimistic environment is that a solution is in process and, according to the markets, is showing signs of working.

Over the past month, the government — be it through the U.S. Treasury or the Fed — has placed in conservatorship Fannie and Freddie, propped up AIG, aided two enormous bank mergers, approved the transformation of Morgan Stanley and Goldman Sachs from investment banks to commercial banks, watched Lehman Brothers fail, insured money markets, raised the FDIC limit and changed accounting standards. So far through this debacle the government has injected more than$1 trillion into the system, and that’s before the $700 billion bailout that Congress just passed. Anyone who has watched the ticker tape of late would likely say these efforts have been futile and that we’re on the brink of collapse. But I offer one underlying salvation.

All of this outstanding aid comes from one source: the U.S. Treasury Department. Be it the FDIC, the Fed or the nationalized Fannie and Freddie, they are all linked to the pocket book of the Treasury. And as I’ve mentioned before, there is only one way for the Treasury to come up with this money — by selling treasury bonds.

One might assume that an entity that drastically increases its debt would be viewed as less credit worthy and be forced to pay higher interest given its increased risk. But that’s not the case with the United States. In September 2007, the total outstanding treasury debt was $9.05 trillion. Today the total debt is $10.19 trillion, a 13% increase. But what’s

 been lost in the wind is that the average interest rate the government pays on its debt has plummeted from 4.9 percent to 3.6 percent during this massive increase in borrowing. Imagine being able to go to your lender and finagle them to lower your interest rate by 25 percent while they extend to you 12 percent more than you currently owe. Well, that’s exactly what’s happened to the United States in the past year.

I can’t tell you exactly why we’ve been able to pull off this magic act. Maybe it’s because we are too big to fail and if the U.S. Treasury Department defaults, the entire world facesstaggering losses as half our debt is owned by foreign entities. Maybe it’s because the Treasury can literally print dollars down in its basement to pay whatever obligations it has. Or maybe it’s because the rest of the world is now facing the same music as the credit crisis is now global and the flight to safety trade ends at Treasuries. What I’d like to believe, however, is that the policies, procedures, transparency, and underlying fundamentals of our American economy are still the envy of the world. To be fair though, it’s probably a combination of all of these factors. Whatever the reasons, the simple fact that this is the case gives me solace.

I’ve been queried numerous times about the new $700 billion bailout package and its ability to stem the tide. To be completely honest, I really don’t know if this is the final solution. I know that $700 billion divided by 300 million (the current U.S. resident population) is $2,333 per person. I know a family could do a lot with $4,666, such as pay off some of their mortgage. But I also know that under current banking regulations $700 billion can easily be leveraged up to $7 trillion if injected properly into the banking system and that can create unparalleled stimulus.

Every day risk adjusts, markets roil and stomachs churn. But when I peer 200 yards outside my office window at 1500 Pennsylvania Avenue (the headquarters of the Treasury Department), I see a proverbial help wanted sign. No matter how you slice it, America has pulled off this coup and the Treasury stands ready to deploy massive amounts of capital that it can borrow at ridiculously low rates. Ideally, the Treasury would issue as much debt as they possibly could at the lowest rates in U.S. history and call older debt that was issued at higher rates. And maybe that’s exactly what will occur. But whatever the case, the flow of the markets indicate that we’re all in this together.

As always, I appreciate your continued trust and confidence.

Warren Capital Group is a fee-based registered investment advisor specializing in wealth protection and growth. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of the firm’s clients -- high net worth individuals, institutions, foundations, and corporations -- and advise them on mortgages, insurance and other aspects of their net worth. Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.

April 01, 2008

Complete Solitude

Commentary by Joseph Warren

December 01, 2007

A Little Credit, Please

Commentary by Joseph Warren

For the last six weeks, the financial markets have been extremely volatile and difficult to navigate. Central banks across the world are attempting to ease lending conditions and provide liquidity to entice banks to lend more readily at a time when credit is simplynot being extended. But for the first time in my memory, these extreme efforts are not having the intended effect, and the consequences must be examined.

On December 13, 2007, the Federal Reserve and the European, British, Swiss and Canadian central banks simultaneously announced efforts to supply their nations’ banks with additional cash. While the significance of this effort cannot be underestimated— this is the largest coordination of liquidity efforts launched since September 11, 2001 — the intended results have remained elusive.

First, here are a few basics of the lending system: When you make a deposit at the bank, the bank in turn takes your money and lends it out to someone else. Many times, the bank will pay you interest on your deposit and offset that interest payment by charging more on the money they loaned to someone else. But in order to comply with federal standards, banks are required to maintain certain levels of reserves on deposit with theFed. The reserve requirement mandates that a bank have on deposit 10 percent of the total value of the balance amounts that customers have in their checking and savings accounts. If that ratio is not met, banks are required to borrow money from somewhere else to get into compliance.Banks can borrow from another bank’s surpluses, or they can borrow from theFed to meet that overnight requirement. The trouble is that while the Fed has lowered the rates applied to overnight borrowing in order to ease lending conditions, banks are still reluctant to pass along these eased standards to businesses and consumers.The primary reason for a lender to become reluctant: Fear of a loss.

With the economy slowing, housing prices falling and mortgages defaulting, banks have become increasingly apprehensive about extending credit to businesses and consumers. This is easily noted in the spread between banks’ borrowing costs, and what they charge on themoney they lend out. When the Fed began to cut rates in August, that spread was around 15 basis points.Today that spread has widened to 90 basis points. So, even though the Fed has made lending more enticing to banks by lowering the banks’ borrowing costs, banks are not extending loans. And given the increased spread, the credit market isindicating that it is more risky to extend credit today than it was three months when lending conditions were much tighter. What’s scary is that there seems to be nothing the Fed or any central bank around the world can do about it. But they are certainly trying.

In the past two weeks, central banks have extended twice as much credit to banks across the United States and Europe as previously anticipated by most economists. The irony is that in the past few years, when lending was less profitable to banks, many risky loans were issued that have now come into default. Loans in default reduce the underlying value of these banks’ assets, and they are now clamoring to stabilize their balance sheets by borrowing from the central banks.Because of this situation, it remains tobe seen if increased central bankfunding will pass into the economy.Right now it’s not happening. If this continues, we’ll all be asking for a little credit, please? 

Warren Capital News  

This past year we were able to dramatically increase our client base,and we doubled our assets under management. We were also able to launch the Warren Capital Foundation, and we directed funds to some very worthy causes. I realize that none of this would be possible without the confidence our clients place in this company, and I am grateful for such support. Thank you for all of your business this past year, and I lookforward to a prosperous 2008.

Happy Holidays!

Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.

April 01, 2007

Let it Roll, Baby, Roll

Commentary by Joseph Warren

Anyone owning real estate these past few years has likely seen their net worth rise substantially with the increase in property values. Major urban markets experienced unprecedented levels of appreciation due to two interrelated factors - leverage and demand - that were onset by the financialturmoil seen in the early part of this decade.To combat recession stemming from theterrorist attacks, the Fed and many othercentral banks decreased lending rates tohistoric lows. Within a matter of months,the cost of borrowing plummetedworldwide. Lower lending costs pose twoopportunities: faster repayment of debt orlarger amounts of borrowing (leverage).This time when the cards were dealt, playerschose the latter and many bet big.

Net worth is calculated by simply deducting liabilities from assets. On a personal balance sheet, the value of real estate is offset by any accompanying debt.Therefore, a person with a $1 million house with a $600,000 mortgage has $400,000 of equity in that property. In an era of high prices and appreciated values, the market’s ability to acquire becomes a dominant factor in maintaining the elevation. In housing, the ability to acquire is determined in the mortgage market.

I hear consistent media banter about the coming demise in the mortgage market. But the more I listen, the more I wonder how well mortgage lending is understood. I’'ve been a consistent acquirer of real estate, and therefore a frequent mortgage applicant, and have become familiar with the lending process.

When applying for a mortgage, lenders evaluate three primary variables: an applicant’s credit score, their debt-to-income ratio and their down payment. As far as thecredit score is concerned, all I can say is the higher the better. I’ve personally had more than 10 mortgages in the past seven years and I have yet to understand the credit scoring system used by the three major companies that track credit, Experion,Transunion, and Equifax. The logical stepsof paying down debt and paying off balances early seem to have little positive relevance. For verification, I invite you to review your score with the majors. Even though all have the same information, myscore varies tremendously between the three and I’'d be willing to bet your’s does as well.Nevertheless, lenders view the score as a crucial item and they tend to use the middle score for qualification purposes.

The debt-to-income ratio is easy to understand, but I question its application. Lenders prefer to have total debts of an applicant under 40% of total income.Therefore, an applicant earning 120K per year (10K per month) would need to have monthly debt payments below 4K. In addition to credit cards, car payments and other monthly obligations, the mortgage the applicant is applying is included in the debt total. It is within this ratio where potential issues loom.

The funding for mortgages has evolved well beyond the traditional products structured by government sponsored entities such asFannie Mae and Freddie Mac. Private funding has become a dominant force in the lending business and has contributed to an array of mortgage products that vastly varyfrom the 30-year fixed mortgage. The biggest change I see is the emergence of interest-only loans where the borrower is only required to make the minimum interest payments for a specific period of time. This varies from the 30-year mortgage where interest and principle is included in each payment so after 30 years the loan is paid off. Of course, interest-only payments are much lower and, when calculated into the standard debt-to-income ratio, fuel an appetite for larger loans with smaller down payments.

Traditional mortgages require a minimum down payment of 20%, which in many expensive urban markets can be hard to muster, especially for a first time buyer.Hence, the emergence of the private mortgage market. An applicant would receive the lowest interest rate with a creditscore above 700, a debt-to-income ratio below 40% and a 20% down payment. But as detailed, this combination is difficult to achieve. To fill the gap, and to makemoney, the private market has created these interest-only and lower down payment products that change the standards for qualification. But in an environment with little equity and stretched incomes, it doesn’t take much price deprecation to create some serious problems. And right now the market is learning to price those problems.

It’s logical for any lender that has taken on more risk to receive higher return. In the mortgage business, that return comes in the form of interest. So, rates on alternative products vary not only on the applicant’s qualification, but also on the private market’s interest. Rising foreclosures and increased inventory of unsold homes are literally changing that interest. In short,lending standards are tightening and mortgage rates are rising as the market is learning to asses this risk. What’s troubling is that this is occurring simultaneous with the resetting of a massive amount of interest-only adjustable mortgages. 

Interest rates hit a bottom around April 2002. The alternative loan product of choice the past many years has been the five-year interest-only mortgage. As it sounds, this loan allows the borrower to pay interest only during the first five years, and then requires interest and principle payments over the remaining 25 years, usually at a higher rate.Under these terms, it is completely plausible for a borrower in this product to see their payment double at the reset. Few borrowers have seen their income double over this time frame and I’m skeptical about their ability to meet this obligation. So, the stage is set for a substantial amount of refi'’s just at a time when the props are changing. But will this unfold into the systemic shock that many currently predict?

In order for that to happen, the private lending market will have to dry up, there by disqualifying a huge portion of borrowers. My experience tells me that this argument about total demise a little far fetched at this point. Capital always seeks return and eventually risk gets properly priced. So, I expect the lenders to adjust their standards and continue to deploy capital at profitable margins. Because they know that when the masses let it roll, the house always wins.

As always, I appreciate your continued trustand confidence.

Warren Capital Group is a fee-based registered investment advisor specializing in wealth protection and growth. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of the firm’s clients -- high net worth individuals, institutions, foundations, and corporations -- and advise them on mortgages, insurance and other aspects of their net worth. Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.

January 01, 2007

Warren Capital Group Wealth Managers: For the Record

Commentary by Joseph Warren

The turn of the calendar marks the season of economic predictions from Wall Street.While last year was my first foray into the world of predictions, I find myself, and more importantly, Warren Capital clients,very pleased with the results for 2006. I’'ve attached last year’s forecast at the end of this commentary for review. In as such, I'’d liketo list the following points of data for comparison:

• Fed Funds currently stands at 5.25%, upfrom 4.25 % in late 2005.

• The price of gold per troy ounce rose from $517.10 in 2005 to $635.20 in 2006, representing a 22.84% increase.

• The technology select spider (XLK) returned over 12% last year.

• Oil prices and energy were consistent headlines in 2006. However, the price of oil per barrel ended the year unchanged.

• Overseas markets were far superior toU.S. markets with the DJ World Indexex-U.S. returning 23.10%. Japanese markets did not participate in this rally,however, as the Nikkei returned a paltry 6.91% in 2006.

• While the yield on the 30-year treasury bond reached 5.35% in April, the bond market ended with an inverted yield curve as the short term rates stand 20 basis points higher than long rates.

• The S&P 500 returned 13.6% for theyear, very close to its 30-year average of12.7%

• Small caps outperformed the large caps with the Russell 2000 returning 17% versus 16.29% for the Dow. Companies like Wisdom Tree, which use fundamentals like dividends rather than market capitalization to create an index, saw tremendous inflows into their products.

• With the exception of biotechnology,portfolios holding railroad, hotel,insurance and iron ore were handsomelyrewarded in 2006.

Given the data, the outlook for 2006 proved fruitful. However, I find myself seeking better means to produce return from macroeconomic thinking. As mentioned in theJanuary 2006 commentary, one certain way to produce profits is to find consensus ideas and then construct portfolios that benefit if and when those ideas don’t evolve. Being correct on non-consensus ideas can yield tremendous profit. In as such, I give a few thoughts for 2007:

• Risk has all but been forgotten in many markets. This is most notable in the miniscule spread between high yield and investment grade bonds and also in the frothy emerging markets. Watch for high yield bonds to be one of the worst performing markets and look for serious corrections in India and Russia.

• U.S. markets are hitting all time highs, insinuating a perfect economic landing. Simultaneously, the bond market is inverted, which is an almost certain precursor to a recession. I look for both measures to come together with the S&P500 producing below average returns and long term yields rising to produce a flat yield curve.

• Economists are forecasting a gradual decrease in profitability coupled with the slowing economy. I expect profitability to remain strong given falling commodity prices in the slowing global economy and labor pressures that ease as more companies outsource to foreign labor markets.

• While the political might in Washington continues to stress the need for currency re-evaluation in China, protectionist measures actually come from the developed world. Companies in surplus countries go on buying sprees around the world and the United States, as well as other developed economies, use national security concerns to block international takeovers.

• Once common correlation conceptions dissipate over the year, whether they are negative or positive. The use of gold to protect against a U.S. stock market decline proves futile. As proven in the second quarter of 2006, emerging markets continue to move in tandem with U.S. markets as oversea investing provides limited diversification.Industrial materials and developed markets provide hedges for U.S. equity investors.

• Real estate markets continue to correcton a local basis. However, the year ends with new home inventory falling. Several home builders return to profitability and when combined with industry consolidation, the sector turns in a solid performance.

• With a slowing global economy, the key theme for 2007 is to find growth. This is more easily done on a regional level than a company level. Recognizing opportunities in both areas prove beneficial, however.

Warren Capital News 

I want to thank the clients of Warren Capital for all of their business. The last year proved very beneficial to our clients and I look forward to a successful 2007.

As always, I appreciate your continued trust and confidence. 

While there is no particular monetary reason, the year’s end marks a natural time for economic reflection and prediction. Although some of the more recent themes ofpast newsletters have not had much time toplay out, an objective analysis of previous comments is in order.

The inaugural July edition featured topics on the housing market and trade deficit. While I might have been a little early calling the housing bubble, inventories have risen dramatically with interest rates, mortgage applications have fallen, and many major markets have seen no price appreciation inthe last half of the year. And while the finalnumbers for the trade deficit will not beknown for a few weeks, my suggestion of a 26% increase in the total deficit is right inline with the year-to-date numbers.

In September, I noted my belief that energy supply concerns were here to stay and that maintaining exposure to oil exploration and refining companies would be necessary to increase investment return. That the meserved our clients well with many exploration and refining stocks posting total returns beyond 50% for 2005 in comparison with a -0.61% change in the Dow.

October offers mixed reviews. The chorus of those expressing concern about United States refining capability has taken hold and announcements have been made about new refining facilities coming online. However,the other warning heeded about a dramatic increase in natural gas prices with the onset of winter has not played out with the mild temperatures so far experienced. Natural gas prices have actually fallen $3 per British Thermal Units since October.

Although my November prediction of a 5% fed funds rate in 2006 will not be known for some time - with fed funds currently at 4.25% and core inflation expected to run at2 ½% in the next 12 months - I consider 5% easily achievable and probably on the low end for 2006.

Finally, my most recent December suggestion about paying mind to the yield curve and watching for inversion is beginning to take hold. Ten-year treasury yields were trading at one-tenth of a percent below 2-year treasuries as of December 29. With the fed funds prediction yet to be determined, my biased calculation of past economic prediction yields five for six (83.33%). A quick lesson learned; never bet on the weather.

In as much satisfaction felt by offering successful themes, my objective going forward is to implement more actionable ideas around such themes. What I havecome to realize, as I now approach my first decade in investment advising, is that one of the most assured ways to make money for clients is to find long-tailed out of consensus ideas that come to be correct. Under that assumption, I offer the following 2006predictions for the record:

• While most economists expect two more rate hikes with fed funds rising to 4.75%, pent-up demand for hiring and capital expenditure will lead toabove trend line GDP growth near4% while inflation edges near 2 ½%, substantially above the Fed comfort zone. I predict fed funds reach 5.25%; however, the year ends with serious consideration given to ratecuts.

• The dollar gradually falls and gold continues to rise as foreign governments move a considerableamount of their reserves away from dollar denominated assets and into gold.

• Companies sitting on hoards of cashwill finally release those funds and invest in their core businesses and upgrade technology. While most Wall Street firms maintain an underweight in technology, 2006 marks a new cycle in tech and it concludes as one of the best performing sectors.

• Energy continues to dominate the political and economic landscape. While the earnings growth rate ofenergy companies declines dramatically, the shear size of dollar profit elevates energy to 13% of theS&P 500 by year end.

• Overseas markets continue to offer compelling returns but proper country selection becomes critical. Japanese reforms continue to takehold and the Nikkei produces strong total return in dollar terms

• After several months of a flat to inverted yield curve, long rates finally rise dramatically with a major move away from long-term treasuries by foreign governments.

• Consistent, solid earnings for S&P500 companies combat continued price to earnings multiple contraction, which is catalyzed by numerous rate hikes. Under such forces the S&P 500 achieves an average total return.

• Despite many predictions by Wall Street that the coming year will produce a boon for large capitalization companies, mid caps outperform again and new products that compete with S&P 500 as acomparison index emerge.

• With inflation running above Fedtargets, companies with pricing power produce the best total return. Portfolios with emphasis on railroads, hotels, biotech, insurance and iron ore are rewarded.

While I am comfortable making thesepredictions, it must be reiterated that profitwill come from proper investment positions.With that in mind, please stay tuned. 

The Numbers  

For your review, here‘s where the markets ended: 

Warren Capital News 

As the year concludes, I want to thank our clients for all the business they conduct at Warren Capital. I am proud to state that after year-end reviews with clients I honestly feel that 2005 was not only asuccess for Warren Capital but also truly rewarding for clients.

As always, I appreciate your continued trust and confidence.

Warren Capital Group is a registered investment advisor specializing in private wealth management and protection and growth for high net worth individuals, institutions, foundations, and corporations. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth. As a fee-based personal wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.

July 01, 2005

Warren Capital Group Wealth Managers: Home Sweet Home

Commentary by Joseph Warren

Passed by any newsstands lately? If so, maybe you’ve noticed the ever present headlines about housing prices. When a quick Google search for “housing bubble” yields more than 2 million results and CNBC dedicates daily programming to real estate analysis, I take notice. Debate will continue to as to whether there is a national housing bubble. What is certain is that various local markets have increased well above trend line in the last few years. Time suggests that housing prices in the District of Columbia have increased 105% in the last five years. The Federal Deposit Insurance Corporation (FDIC) states that 55 markets saw real price gain of 30% or more over the last three years, which is a record. Furthermore, homeowners have implemented much more creative financing in an effort to make mortgage payments more affordable. To quote Mr. Greenspan:

“There is a major move in mortgage originations to interest-only and another to all sorts of adjustable rate mortgages with very hybrid, very imaginative constructions. People are reaching to be able to pay the prices to move into a home.”

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