FHA loan limits have increased

Good news for any of the mass affluent in the market for a new home. The FHA has increased the loan limits of its loan guarantee program. Insured mortgages equals lower rates. (To see what I mean, compare the differences in rates between jumbo mortgages and insured mortgages.)

The stimulus bill allows FHA, Fannie Mae and Freddie Mac to guarantee loans of up to 125 percent of the median home price in high-cost markets, up to a maximum of $729,750 for one-unit properties. The cap for two-unit properties is $934,200; three-unit properties is $1,129,250; and four-unit properties is $1,403,400.

The floor limit for FHA loans in "normal markets" remains $271,050 for one-unit properties, $347,000 for two-unit properties, $419,400 for three-unit properties, and $521,250 for four-unit properties.

What are the high-cost markets? You can find the list on the FHA Web site (it's an Excel spreadsheet). Basically, the markets center around the major U.S. cities; New York, D.C., Los Angeles, Denver. etc.

State of the state of the collectible car market

I'm not a real car buff (wouldn't even be able to change the oil in my car), but I do have this fantasy about owning a classic American muscle car. So, I followed with some interest the Arizona auto auctions that recently took place, and found they were far from disasters.

What are the Arizona auto auctions?

First, a little background. Barrett-Jackson, Russo and Steele, Gooding & Co. and RM are four automobile auction houses that each run their own auction in January in the Phoenix/Scotsdale area. Barrett-Jackson's auction seems to be the biggest in terms of dollar sales made. Their auction is also the only one not to set reserve prices. Russo and Steele was founded by a former Barrett-Jackson employee. Gooding is relatively new to the Arizona auctions, but was the only one of the four to have a sales increase this year. RM is the leader at the high end of the market. The auctions attract an over 55 moneyed crowd.

This year's auctions results

From the Barron's article:

At the auctions, the top prices generally were fetched by prewar U.S. and European classics; the bottom, by 1960s American muscle cars without adequate provenance. Entry-level cars priced at less than $100,000 -- veteran collectors call them "drivers" -- did well, especially with first-time buyers. Among sports cars, vintage Ferraris did fine. Newer ones didn't.

Overall, prices are below the high-water marks of the past two years. But the bulls contend the 20%-to-30% drops simply reflect the cooling-off of an overheated market, rather than a long-term slump like those that have devastated stocks and home prices.

I like to see that the muscle cars I want to buy are coming down in price. Good for me, but bad for the sellers

The Times take on things:

Given the economic circumstances, there was great interest in cars priced under $100,000 that would also serve as summer weekend drivers. Cars that are easy to find parts for, and eligible for events like vintage rallies and tours, did well.

Do you remember hearing about GM selling some of its historic car collection to raise capital? Well, they used these Arizona auctions too, although the articles imply the reasons for the sale were not for GM to raise capital.

One of the notable aspects of the Barrett-Jackson sale was the sale of 214 cars from the General Motors Heritage Collection. Most were prototypes or concept cars and included the striking 1996 Buick Blackhawk. Built to celebrate Buick’s 100th anniversary in 2003, it recalled the granddaddy of all design studies, the striking 1938 Buick Y-Job; the Blackhawk sold for $522,500.

Nearly all the cars in the G.M. offering were sold on either a bill of sale or a scrap title, according to Barrett-Jackson. The former, Mr. Jackson said, can never be legally registered for road use. Fortunately, the Blackhawk was sold on a scrap title so it can be registered and driven on public roads. It would be a shame for it to spend its life behind a velvet rope.

(This bill of sale vs. scrap title bears further research. I spent a few minutes on Google to little avail. Comments on what this are welcome.)

The car auction houses

Name	URL	Other Auctions
Barrett-Jackson	www.barrett-jackson.com	Florida in April and Las Vegas in October
Russo and Steele	www.russoandsteele.com	Florida and California
Gooding & Co	www.goodingco.com	California in August
RM	www.rmauctions.com	Numerous. Check out www.rmauctions.com/Directions.cfm for more details.

And you thought 100 year bonds had a long duration

Disney and Coca Cola issued 100 year bonds about 15 years ago, and made headlines (at least in the financial world) doing it. But those are nothing compared to some New York City bonds with nearly 300 year maturities.

Next month, one of the bonds, issued in 1868 and thought to be one of the oldest active municipal bonds in the country, will come due. And the city stands ready to retire the debt incurred when Winston Churchill’s grandfather came up with the idea of building a road to one of the nation’s first racetracks, which he had opened in what is now the Bronx.

For 135 years, New York City has been dutifully paying 7 percent annual interest on the bonds, which financed construction of the road. On March 1, the owner of one of them is entitled to come forward and collect its face value: $1,000.

The 38 other bondholders have notes that will mature sometime between now and 2147, a mere 138 years away.

A 7% yield for basically your lifetime, and probably your great-grandkids lifetimes sounds like a pretty good deal now. And municipal bonds are tax free too.

What would possess a municipality to issue bonds of this duration?

West Farms, where the track was, and Morrisania, which would share the road, could not afford the improvement. So the towns issued bonds, backed by Mr. Jerome, with unusually long maturities, gambling that their rapidly expanding neighbor would soon absorb them, and their debt.

“Everybody knew because of the shift of population northward, it was only a matter of time before the City of New York was going to annex the territory,” Mr. Ultan said. “So they issued these bonds with the date of redemption so far in the future because they figured that once the City of New York annexed their town, then the City of New York would assume the payment of the bonds — which is exactly what happened.”

Waiter, there's an annuity in my 401(k)

Guaranteed income during your retirement. That would certainly set your mind at ease. How do you get a guaranteed income? Social Security? Ummm, errr. A company pension? Sadly, those are a relic of the time of Don Draper. A relatively new and untested option, 'hybrid 401(k)s', may be able to provide the guaranteed income you're looking for.

A dozen or so asset managers and insurers, including AllianceBernstein, AXA, Barclays Global Investors, John Hancock, MetLife, and Prudential, are designing a new breed of retirement instrument that combines elements of pensions and 401(k)s. These products—call them hybrid 401(k)s—have begun slowly rolling out. And while they differ in structure, all combine annuities—essentially, insurance contracts that provide periodic income payments—with an investment portfolio. The hybrids won't protect investors from violent market swings. But they'll guarantee a certain amount of monthly income for the rest of your life.

[...]

The structure BGI's finance wonks came up with embeds fixed deferred-income annuities (which provide a set amount of monthly income in retirement) into a target-date fund. A 401(k) participant who chooses SponsorMatch—or whose employer uses it for the matching contributions—would have part of each contributed dollar invested in the annuities and part in the investment portfolio. Essentially, the annuities replace the bonds that would normally be in your portfolio (emphasis mine). If you're in your twenties or thirties, you'd have only a small portion in annuities; but as you age, that portion increases. As with a regular target-date fund, BGI would make those changes for you. Your investment portfolio, comprised of index-based investments, would also be automatically managed for you based on your age. You would simply pick SponsorMatch and sit back. When you received your 401(k) statement, you'd see two pieces: the amount of monthly income you'd have in retirement and the value of your investment portfolio.

Why do we need yet another asset type to put in a 401(k)? A BGI executive makes the argument that 401(k)s weren't meant to be the primary way of saving for retirement. 401(k) investors have historically underperformed institutional investors by 2% a year. There is also the problem of outliving your retirement money. These hybrid 401(k)s promise guaranteed lifetime income (for a price), and are designed to be more like pensions than traditional 401(k)s.

What's wrong with plain old target-date funds?

You might think that current target-date funds would be set up to provide lifetime income, obviating the need for an annuity in the fund. As it turns out, even those funds with the closest target date suffered bad losses in the recent market downturn, impairing their ability to provide income. The reason for this impairment was a heavy stock allocation in those target-date funds.

Fidelity Freedom 2010, which is down 21% year to date, had about 49% of its assets in stocks as of Aug. 31 (these are 2008 dates), according to Morningstar. Vanguard Target Retirement 2010, down 19% this year, had 54% in stocks as of June 30. T. Rowe Price Retirement 2010, down 23% year to date, had about 59% in stocks at June 30.

In fairness, and as one of the fund representatives mentions in the linked story, some of these funds are planning for people with 40 year retirements, which would require a heavier allocation of stocks than bonds in order to make the money last that long. But at first glance I would have expected a 2010 target-date fund to have a much higher bond allocation.

Can we become annuity fans?

Given the fact that the target-date funds hold a high allocation of equities, and the risk of the markets tanking like they've done over the last year, annuities may be a workable solution to the lifetime income problem. Now, I'll come right out and say that I have a bias against annuities. One of the articles addresses this directly:

Academic research has long shown that retirees need monthly income and that annuities make sense in theory, but people don't like them—often for good reason. Many retail annuities sold to retirees are too complicated, too expensive, and too restrictive.

The annuities in the hybrid 401(k) mostly avoid these issues. The fees are only 50 basis points, and there are no fees to cash out. But I have seen nothing about how the hybrid 501(k) will mitigate the insolvency risk of the insurer that is issuing the annuity. In these times, I worry about insurers going belly up and being unable to pay an income stream. Regular 401(k) funds hold stocks and bonds. Short of massive fraud, even if your fund company goes belly up, the stocks and bonds in the fund should still be there. When an insurance company goes belly up, I worry that there might not be anything there with which to pay your annuity.

Enter your state's life and health insurance guaranty association. Each state has a guaranty association that will backstop insolvent insurance companies. There is a Web site, http://www.nolhga.com/, with information about state guaranty associations. For example, in my state of New York, the Life Insurance Company Guaranty Corporation of New York, will only protect up to $500,000 of annuity contracts. I would like to hear more about how the annuities in the hybrid 401(k)s would be insured.

Finally, and off on a bit of a tangent, contrast the insurance guaranty association's annuity protection with that offered by the Pension Benefit Guaranty Corporation (PBGC), which guarantees failed company pension plans. In 2009, the maximum monthly guaranty (with no survivor benefits) for a 65 year old is $4,500. The PBGC monthly guarantee equates to a return of over 10% a year on $500,000, and it's risk free since it's guaranteed by the PBGC.

Estate planning for your home

Most of us won't be hit by the estate tax when we shed this mortal coil. Even adding in the value of a home, the vast majority of Americans won't owe an estate tax, so their homes can be passed on to their heirs and avoid most taxes. Those who would be hit by the estate tax can do some prior planning to pass on a home with as little tax implications as possible. One sophisticated strategy is a qualified personal residence trust.

Here's how a QPRT works. Say a retired doctor in Florida wants to give his $1 million beachfront home to his two daughters. This strategy would require the doctor to put his home into an irrevocable trust for several years, while he continues to live in it. Through a complex IRS calculation based on interest rates, the length of the trust and his age, the IRS values his right to live in the house at, say, $600,000.

For the purposes of his taxable estate, that knocks the value of his house down to just $400,000 -- regardless of how much the house appreciates in the meantime. (That $400,000, though, comes out of the doctor's federal gift- and estate-tax exemptions.) When the trust is up after the stipulated number of years, if he chooses to continue living there, he can pay his daughters rent, further reducing the size of his taxable estate.