Finance from Inside!

HUD had been discussing a new variation of the Reverse Mortgage program for quite a while and they finally announced some of the particulars. The program, which they have decided to call the HECM Saver, will be a limited version of the regular HECM reverse mortgage that HUD has had in place that will now be referred to as the HECM Standard. The new HECM Saver is intended for borrowers who do not intend to borrower the full amount of funds available to them under the HECM Standard program and as a result, will receive lower up-front mortgage insurance fees for the lower risk to HUD.

Originally it was thought that the HECM Saver program would be much more popular with fixed rate borrowers since the fixed rate option requires borrowers to take a lump sum distribution of all the funds available to them under the program at funding. Many borrowers who expressed a desire to have a fixed rate but didn’t want all the funds in the past had to either switch to the adjustable rate program, take the money and then pay some back or rethink what to do with the excess funds.

The fixed rate did not allow them to leave the money in a line of credit, which would not accruing interest on the funds until they actually were borrowed, if ever, by the borrower. With a lump-sum distribution all the money is borrowed at one time and interest accrues on the entire balance. A smaller amount borrowed means less interest accrued. According to an announcement from the National Reverse Mortgage Lender’s Association, HECM Saver will give the borrower approximately 10 – 18% less money than the HECM Standard.

With the recent events of reverse mortgage lenders paying many of the borrowers up-front costs on the fixed rate products, the lowered up-front mortgage insurance premium for the HECM Saver of 1% of the appraised value or HUD Lending Limit (whichever is less) does not appear to be a huge assistance for the borrowers at this time. However, lenders paying this fee for borrowers is a relatively recent development and if things change in the secondary market or in the legislative arenas that changes this back to where borrowers are paying all their own fees, then the 1% reduction can lower borrowers costs by thousands of dollars. And since the HECM Saver can be used with any HECM product, borrowers who know they will not use all their HECM proceeds can elect the HECM Saver for the Line of Credit and monthly payment options as well, saving them thousands of dollars in closing costs on those loans as well making this a nice option for the adjustable rate loans.

Although the upfront premium for the HECM Saver will be reduced to 1% and the HECM Standard program will remain the same at 2%, both programs will see an increase in the amount of the annual premium charged to the borrower to pay for the mortgage insurance renewal. The mortgage insurance premium for the annual renewal will be increasing from .5% to 1.25% of the unpaid principal balance based on the proposed changes at this time. There are still some possibilities that these programs may change more than outlined above. The House passed a Bill which has already reduced a credit subsidy in the Obama Budget for the HECM programs. The Senate has their own version of a Bill which would slightly raise the House subsidy, but both are at least $100mm less than the original subsidy contained in the President’s budget. The HECM program was intended to run without subsidy so there is still uncertainty as to whether or not the reverse mortgage program will require further cuts.

The Court granted an insurer’s appeal from a judgment finding that it was liable to its insured under the terms of a broad-form, all-risk policy of insurance, to cover the costs of mould remediation and prevention to an apartment complex owned by the insured.

Minox Equities Ltd. v. Sovereign General Insurance Co., June 16, 2010, Manitoba Court of Appeal, R.J. Scott C.J.M., M.A. Monnin and F.M. Steel JJ.A.

The insured owned a housing complex, for which it purchased a broad-form, all-risk policy of insurance from Sovereign-General Insuance Co. between 1993 and 2003. The Complex was built in 1977 and within two years there were reports of water leaking into some apartments via vents and light fixtures. These problems continued and a persistent mould problem developed. The mould problem was addressed on an ongoing basis with bleach treatments and by replacing damaged drywall and carpeting as necessary. No insurance claims were made with respect to this damage.

In 2001, it was discovered that some of the mould was toxigenic and further investigation revealed that the toxigenic mould originated from a “mould amplification site” within the building. Mould remediation and elimination of conditions leading to mould propagation, such as replacement of doors and windows, was recommended. Following further investigation, the insured submitted two proofs of loss in late 2002, for $8,585 and $646,000 respectively. The insurer denied coverage of both proofs of loss, on the basis that the build-up of humidity causing the mould growth was not the result of a risk or peril; and exclusions against latent defect or improper design and seepage of water or dampness of atmosphere applied. The insurer also stated that the insured had failed to report the loss on a timely basis. The insured subsequently started this action. 

At trial, the judge determined that the evidence established that there was seepage of water through doors or windows, that there was the entrance of rain, snow or sleet through doors or windows, and that there was dampness of atmosphere in the Complex, all of which contributed to excess humidity and moisture within the units of the Complex. He also determined that moisture was an essential ingredient for the development of mould. However, because the evidence established that mould would not inevitably result from moisture or humidity problems, the trial judge was unable to conclude that the excessive moisture was a direct or indirect cause triggering the appearance of the mould. On that basis he concluded that the loss was not excluded under the policy.

On appeal, the Court found that the trial judge had erred in his interpretation and application of the exclusion clause. The Court noted that the use of the phrase “directly or indirectly” generally connotes that both the direct and consequential losses of an event are captured. Thus, as long as the evidence indicated that mould was a direct or consequential result of the seepage, rain, and humidity, then the exclusion clauses would apply, absent other issues. In this case, the evidence, as found by the trial judge, was clear that the seepage, rain, and humidity present in the Complex led to the moisture and humidity conditions which were so conducive to mould growth. Even if the mould was the result of concurrent causes, the use of the phrase “directly or indirectly caused” in the exclusion clauses, allowed the exclusion clauses to apply. Therefore, even though the evidence indicated that the right temperature, adequate food, and mould spores needed to be present, the evidence also established that moisture was a prerequisite for mould growth.

It was clear that the seepage, rain and humidity problems within the Complex contributed at least indirectly to the growth of mould within the Complex and consequently, the exclusion clauses applied. In the result, the Court allowed the appeal, holding that the insurer was not liable to the insured to cover the costs of mould remediation and prevention.

In the begining, when Americans were still reeling from the after shock of a freshly burst credit bubble and a crash in the housing market, to mention the term Recession felt almost dirty. Only the brave few dared to mention the “R” word for fear of persecution or being labled as a doomsday party-pooper. Most settled for the more amicable Economic Slowdown.

But as time went on and people got used to the idea, Recession began to frequent headlines and coffee table conversations alike. It became a familiar companion and guide, helping the masses decide what to buy and what to leave out, where to go, and what to pass up on. Then, as the year 2009 was coming to a close, Economic Recovery took center stage. But ER’s fame seems short-lived, it’s spot light dimmed due to the possible immergence of Double-Dip Recession…

Our economy is still lousy: the housing market continues to be weak, unemployment remains high, and now, surprise, surprise, there has been an overall slow down in economic growth.

As economists and governement officials duke it out with the likes of Wallstreet financials and power lobbyists over what to do to spur some economic salvation, a new economic reality seems to be setting in; and all indicators suggest that it will leave an indelible imprint in the collective consumer psyche for years to come.

For the small business owner, accepting this reality and knowing how to adapt to it can make the vital difference between success and failure. In this post I will offer a rundown of the five long-term consumer trends that will continue to shape our economy- trends that small businesses owners cannot afford to ignore- and what all this may mean for the average small business in the US.

1. High unemployment changes the workforce lanscape. According to the U.S. Bureau of Labor Statistics, the rate of unemployment has stalled at 9.5%, with some 14.6 million people seeking jobs, and it doesn’t look like that figure will be coming down any time soon. The fallout? The Wall Street Journal recently reported that more people over the age of 60 are choosing to retire rather than search for scarce jobs. Many out of work are also seeking freelance or independent consultant jobs, others are trying the entrepreneurial route. In

 ()

In short, there are three trends that will likely affect small business owners:

1. Consumers have less disposable income.
2. A large pool of talented freelancers and independent consultants are out there, and using their services is generally more cost effective than bringing these same functions in-house.
3. Depending on the nature of your small business, there may be more competition from other new business owners looking to tap into your niche market.

2. It’s becoming more acceptable to rent. There was a time when owning a piece of real estate was part of the American Dream. These days, the housing marketed is limping badly. According to the National Association of Realtors, existing home sales plummeted at staggering 27.2% in July.

()

Why the sea change? Typical home buyers may lack funds to buy a new house, or they might fear investing in a property now that home prices are poised to fall again. Belying all these figures has also been a growing societal acceptance of a renter’s lifestyle. According to a recent Harvard study, the number of renters has risen by 10% in the past five years.

This trend is heavily affecting several industries including, home buildering, construction and rennovation companies, home refurbishing, home cleaners, and landscapers.

3. Saving is the (new) goal. With their hubrious in check, Americans are curbing their spending. In June, credit card balances fell by 6%, according to the Federal Reserve, while personal savings have tripled in the past three years. Another sign of a thriftier lifestyle: retail e-commerce sales rose slightly in the 2nd quarter of 2010, as cost-conscious consumers seek out the best deals.

(

While no one would argue that all this saving is detrimental, the fallout has been that there is less cash flowing specifically when it is most needed to grease the wheels of our stalled economy.

4. Risk adverse money manuvering. Weary Americans seem to have lost their appetite for risky ventures. Wanting to avoid repeating the losses they suffered when the market plunged, and not trusting the current economic “stability,” individual investors have pulled out of the stock market in droves, choosing the more staid bond vehicles instead. Additionaly, many consumers as well as small and home-based business owners alike are moving away from banks and seeking do-it-yourself financing alternatives, such as peer-to-peer lending or borrowing against retirement plans.

()

5. Purchases influenced by the Internet, social networking. In an effort to stretch their dollars, consumers are increasingly scouring the Internet for the lowest prices and the best deals. The U. S. Census Bureau recently reported that U.S. retail e-commerce sales for the second quarter of 2010, was $39.7 billion, an increase of 2.6 percent from the first quarter of 2010.

 (Image Credit)

This trend has been helped by the rise of Internet coupon sites as well as group purchasing sites (where consumers band together to take advantange of a promotional offers by various businesses), such as groupon.com, which have changed the way consumers shop. Social networks are also heavily influencing most consumers’ purchase decisions, according to recent research. Consumers are paying attention to recommendations made by friends or the negative comments made about new products.

http://money.cnn.com/2010/08/20/news/economy/New_normal_economy.fortune/index.htm

http://www.nytimes.com/2010/08/22/business/22invest.html?_r=1&hp

http://www.census.gov/retail/mrts/www/data/html/10q2.html

http://www.gartner.com/it/page.jsp?id=1409213

Is investing in your employees good for business? According to a new report, “Profit at the Bottom of the Ladder,” (Harvard Business Press), the answer is unequivocally, “Yes.”

Jody Heymann, who led the study behind the report, researched twelve companies in nine countries. Every company had policies that improved conditions for their lower-level workers. She examined how they succeeded despite spending on non-essentials, such as employee education and healthcare. In every case, investment in workers improved companies’ bottom lines.

The study credits several employee-focused tactics with increasing companies’ productivity and reducing their costs. Here’s a list of some examples:

• On-site healthcare: SA Metal opened its own health clinic, so employees wouldn’t have to waste work hours traveling to doctors. Employees’ needs were served, and they produced more for the company.

• Training and career opportunities: Xerox Europe, frustrated by high turnover rates of call center employees, started highlighting career opportunities within the company. Within one year, 20% of its low-level employees were promoted to higher-level positions. Workers who sensed a better career future were more likely to continue working at the company.

• Listening to employees: Great Little Box Company offered a cash incentive to employees who suggested ideas that saved the company money. An employee suggested an additional use of an existing machine, thereby increasing productivity. The “hands-on” workers often have the best ideas for improving tasks.

• Flexible vacation policy: Autoliv Australia saw its worker turnover decrease significantly after implementing a more flexible policy about leaves and vacations. Workers with a sense of autonomy feel more positive about their jobs.

• Improving teamwork: American Apparel assigned its workers to teams, and then paid individuals based on team output. That incentive led garment production at a one of its factories to triple. Encouraging employees to work together increased productivity.

Positive employee conditions generate financial success. An investment in your employees equals an investment in your business.