Financial knowledge different from financial wisdom
June 24, 2011 2:48PM
Updated: June 26, 2011 2:25AM
Dear Mr. Berko: Our 38-year-old son is married with two children and has been living with us for two years. The grandchildren are in school, and he and his wife both work but don’t contribute a thing for rent or food or utility costs. We can afford the extra costs, but we are getting tired of this and have nicely told them so. We’d like them to move and have been told that some credit unions are offering no-down-payment mortgages. Please tell us about this program and whether there is a hook or catch we should know about.
Both the kids earn about $10 an hour and haven’t saved any money. They pay more than $21,000 a year for health insurance, auto insurance, credit cards and auto payments. If that no-down-payment mortgage is pie in the sky, please let us know. We want them out and will even give them the down payment if necessary.
Finally, we both recently took the required minimum distribution from our IRAs and have $42,000 to invest. Our broker recommended a 5.5 percent preferred stock mutual fund. But we were thinking about municipal bonds, which our broker does not like. He’s very knowledgeable and thinks the municipal bond market is going to “crash and many investors will be wiped out.” Please give us your thoughts, plus individual recommendations on prices and yields. — LW in Springfield
Dear LW: When I graduated from college, my dad warned me not to confuse knowledge with wisdom. “Knowledge,” he said, “is knowing that a tomato is a fruit, and wisdom is not putting that tomato in a fruit salad.” The muni market had a mini-crash almost a year ago, and few investors took losses. Still, there are A-rated municipal bonds out there that have yields in excess of 5.75 percent. And there are many good lower-rated (BBB to B) municipals with yields above 6.75 percent. These are long-term maturities (15 to 25 years), and there’s still a lot of low-hanging fruit to be picked.
You can also cherry pick among the Illinois and California issues mentioned in this column several months ago. I like them because: 1) They are oversold. 2) They yield more than Treasuries. 3) The municipal market has bottomed out. 4) Congress must raise federal tax rates to reduce the deficit. 5) Congress may change the rules on municipal bond interest for investors.
Several sources I trust believe a tax increase is inevitable after the 2012 elections. And Congressman John Boehner, before he became Speaker of the House, told one of those sources: “It’s so much easier to raise taxes than cut spending.” Certainly most of the 535 selfless and devoted members of Congress agree.
However, I won’t mention specific prices or yields. Depending on a brokerage’s markups, commission and greed, the price of an A-rated 6 percent Illinois Sludge & Slurry Bond can vary as much as 15 percent to 20 percent per thousand. In other words, a buyer may pay between $8,500 and $10,000 in the municipal bond market, where retail plunder and spoils are legendary. If you are a doubting Tom, ask your broker to recommend a muni from his inventory. Then ring Merrill, Edward Jones or Morgan Stanley and ask what they would pay you for that bond. The difference in price may knock your socks off. So, as Sgt. Phil Esterhaus used to say: “Hey, let’s be careful out there.”
By George, by Geronimo, buying homes with zero down is coming back to haunt us. Yep, once again Ken and Barbie can buy their dream home without a dime down providing it’s a primary residence and the cost does not exceed $650,000. This deal is offered by the NASA Federal Credit Union (anyone, even illegal aliens, can become a member) and applies only to homes in Virginia, Maryland and Washington, D.C. While this credit union doesn’t make loans in Illinois, there may be some credit unions in your area that do. If not, make a contribution to your congressman’s re-election committee and ask for help. Certainly his caring influence may enable your son to get a “no-down” from one of the congressman’s Illinois banks.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at firstname.lastname@example.org.