And more hard news: on average folks who work in financial services make 52 percent more than you do.

“Corporate profits with inventory valuation and capital consumption adjustments) increased $32.5 billion in the third quarter,” said the BEA. So if company profits are on the rise should that not mean the government will collect more tax revenue and reduce the deficit? Er, no, said the BEA:

“Taxes on corporate income decreased $9.1 billion in the third quarter, compared with a decrease of $1.8 billion in the second.”

Well wait a minute. There must be some accounting in there which shows that for some reason corporate profits are down and therefore taxes should be lower.

Nope. That’s not it.

The domestic profits of financial corporations — banks, financial holding companies, etc. — increased $9.2 billion in the third quarter. Non-financial corporations saw profits grow by $17.9 billion.

You’ll Earn More In Banking

Notice that profits rose by $27.1 billion — of which 34 percent was earned by banks and financial companies.

In terms of income, the Bureau of Labor Statistics says the median wage of someone in the financial services field is $67,690 versus the general wage of $44,410. That’s a 52% premium.

Income, of course, is very important. The more you earn the more likely you are to get a good FHA, VA or conventional mortgage at a good rate — and the less likely you are to be foreclosed.

For the past few weeks the government has been debating the issue of whether to raise the payroll tax by 2 percent — but there has been little or no debate regarding an increase in effective corporate taxes. For all the yelling and screaming of those who claim that business is over-regulated and over-taxed, the plain fact is that while corporate revenues are rising corporate taxes are not — meaning Uncle Sam has less money from the very businesses it nurtures and protects until they are large enough to take jobs overseas, buy back their own stock and lay-off workers within our borders.

Today the top marginal tax rate is 35 percent for individuals. Under President Reagan the top marginal rate was 69% and it was 92% under President Eisenhower, 91% under Kennedy, 77% under Nixon and Johnson, and 39.6% under Clinton.

Deficit Interest

The real cost of the deficit lies ahead. Right now Uncle Sam has a mountain of debt but pays virtually no interest. As one example, Treasury inflation-protected securities, or TIPS, reached a record yield of minus 0.877% in mid-December.

Imagine the deficit if interest rates increase…and then try to imagine a world where interest rates will not go up at some point….

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But, what’s usually not mentioned is that Social Security is actually doing pretty well — for the moment at least it’s doing better than much of the private sector.

Don’t believe it? The latest available figures show the Social Security system is actually generating a surplus.

According to its Board of Trustees, the Social Security system paid out $685.8 billion during 2009. Notably it cost $6.2 billion to operate the system — about 1 percent.

And what about revenue? It turns out that the system took in $807.5 billion. That money comes from contributions ($667.3 billion), interest ($118.3 billion) and taxes on benefits ($21.9 billion).

If we subtract costs from income then in 2009 the program had a $121.7 billion surplus.

For 2010 the Trustee’s report also shows there’s a surplus but not as much: The system paid out $712.5 billion but took in $781.1 billion. That’s a difference of $68.6 billion.

The Federal Deficit

If someone tells you the Social Security system contributes to the federal deficit have them look at the Social Security Act.

“By law,” says Rep. Xavier Becerra (D-CA), ranking member on the House Subcommittee on Social Security, “Social Security can only spend what it has: the contributions workers make from their paychecks, the bonds purchased with those contributions, and the interest earned on those bonds. By law, Social Security cannot contribute to the federal deficit.”

Demographics

With more retirees and relatively-fewer workers the Social Security system will have to change over time. Most likely, that means a later retirement age before full benefits kick in. As well, the income base for the Social Security tax could be expanded from just wages to dividends and interest and the tax could also be applied to income above the current maximum of $106,800. Were contributions based on all income sources Social Security benefits could actually be raised.

Unfortunately for many retirees Social Security benefits by themselves will be insufficient to maintain today’s lifestyle. The Pension Rights Center says the average individual receives $13,836 from the system each year.

While many people will be unable to materially-increase their retirement income they may be able to reduce their costs. For some, the choice will be to obtain a reverse mortgage. Here’s why:

Imagine that the Smith’s have a “forward” mortgage which now costs $2,000 a month. Of this amount, $1,500 is for mortgage principal and interest, $100 is for homeowners insurance and $400 is for property taxes.

With a reverse mortgage they may be able to pay off their current home loan. There are no required payments for a reverse mortgage saving the Smiths $1,500 per month. They would, however, have an obligation to pay their tax and insurance costs.

Is a reverse mortgage right for everyone? Surely not. But it can work for selected seniors with real estate equity and a preference to age in place. It is, at least, an interesting option to discuss with tax professionals, fee-only financial planners and reverse mortgage lenders.

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“The number of people in poverty in 2009 is the largest number in the 51 years for which poverty estimates are available,” according to the Census Bureau.

Few examples better illustrate the changing times we face then the death of Kyle Willis. Mr. Willis, age 24, died from a tooth infection. Why? According to WLWT-TV in Cincinnati, the unemployed and uninsured father and aspiring paralegal could afford either pain medication or antibiotics — but not both. His face swollen, he got the pain medication. Meanwhile the infection spread to his brain.

In a rich country with massive investments in healthcare why should anyone have the dilemma faced by Mr. Willis?

Perhaps Mr. Willis and many other people would have better options had the country adopted the “Second Bill of Rights” proposed in 1944 by President Franklin Roosevelt.

Here’s what Roosevelt said as America fought wars in Europe and Asia:

The Second Bill of Rights

This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights—among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.

As our nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.

We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. “Necessitous men are not free men.” People who are hungry and out of a job are the stuff of which dictatorships are made.

In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all—regardless of station, race, or creed.

Among these are:

• The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
• The right to earn enough to provide adequate food and clothing and recreation;
• The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
• The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
• The right of every family to a decent home;
• The right to adequate medical care and the opportunity to achieve and enjoy good health;
• The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
• The right to a good education.

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.

America’s own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for all our citizens.

For unless there is security here at home there cannot be lasting peace in the world.

Some will say that what Roosevelt proposed was simply a form of socialism or an outmoded notion of altruism the country can ill-afford, but you have to wonder what the daughter left behind by Mr. Willis will think when she grows up. Is the cost of treating a toothache really worth the loss of a parent?

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The short answer is that mortgage rates move on their own, with very little impact from the government.

Investors

Investors looking for mundane, low-risk returns generally have a choice between 10-year Treasury notes or 30-year mortgages. The two investments compete because 30-year loans are rarely outstanding for their full term, homes are typically sold or refinanced long before 30 years.

The result is that risks and rates for the two forms of investment are fairly similar so investors will move their money to the option which is best for them.

But can’t the government force mortgage rates up or down?

Oil & Energy

To answer this question take a look at oil prices. It would be very much in the interest of the United States to force down oil prices given that higher energy costs hurt our balance-of-payments, fuel inflation and are, essentially, a tax on every household. But the government — regardless of which administration you choose — has little to no leverage with suppliers such as our good friends and allies in Saudi Arabia, Iran and Venezuela.

Another part of the puzzle is that we value oil in terms of dollars. This is very good for the US, so naturally there’s a movement by Iran and others to measure the cost of oil in some other currency. In effect, one reason the price of oil has gone up is that each dollar buys less as a result of inflation over time. The way for energy producers to combat this loss of buying power is to raise oil prices.

For instance, oil futures have recently been priced at $99 a barrel. That’s in 2011 dollars. Corrected for inflation this $99 has the same buying power as $77.96 in 2001.

Inflation

Inflation to some extent is really not a problem — as long as your income keeps up. Unfortunately that has not been the situation for most American households.

Those with a household income of $52,587 in 1999 were likely to earn $50,303 in 2008.

Government-Set Rates

What the government could do — and what the government used to do — is set interest rates, not for all mortgages but for federally-insured mortgages such as FHA mortgages and VA financing. In fact, HUD actually set FHA mortgage rates until November 30, 1983 while the VA set rates until October 28, 1992.

Investors could then support government-backed mortgages or not — remember the government cannot compel investors to invest. If the market response was a fat “no,” if the set interest level was too low, then the government would have to raise the official rate. Such a system would effectively create an offer which investors worldwide could accept or not accept.

Of course, if the government again set mortgage rates for FHA and VA loans the public would readily know how much to pay for real estate financing. It’s an idea that worked well in the past, so why not now?

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The fate of millionaires, of course, is a major concern to all of us, something akin to the latest rehab news from Hollywood. It catches your attention.

The really good news concerns the US. When it comes to millionaires we’re #1.

“In spite of the rapid growth of wealth in the EM (emerging market) economies,” said Deloitte, “U.S. and Europe will remain the global centers of wealth over the next decade, in terms of both the amount of wealth held and the number of millionaire households. Our analysis indicates that aggregate wealth of millionaire households in the U.S. in 2020 will likely reach $87 trillion, from $39 trillion in 2011.”

That means US millionaires will see their wealth more than double during the coming decade.

Wealth In America

And, adds the study, “our forecasts suggest that, in 2020, 43% of the world’s wealth among millionaire households will be in the U.S. Opportunities for growth potentially exist via greater U.S. state penetration. In the U.S., California will likely have the most number of wealthy households, while New Jersey may continue to have the greatest density. The East Coast is likely to see the highest growth rates — New York and Florida together may add 1.5 million new millionaire households by 2020.”

I think this is great stuff. Having lots of millionaires suggests a vibrant economy and widespread opportunity.

Indeed, the report tells us “the U.S. is likely to continue to be home to the largest number of millionaires, potentially rising from 10.5 million households in 2011 to 20.5 million households in 2020. Its nearest competitor may be Japan with an estimated 8.6 million millionaire households in 2020.”

Household Income

What about the rest of country, the non-millionaire households?

According to the Census Bureau, the typical household income was $52,587 in 1999. By 2008, that figure dropped to $50,303.

In other words, household income is falling and the average figures are actually high for many families. The median income for Black households in 2008 was just $34,218 while Hispanic households took in $37,913.

The household income figures tell us that not everyone is getting in on the good times. And looking toward the future, it’s apparent that a lot of average folk won’t do as well as our financially-advantaged citizens.

Down To Earth

Consider the NASA space shuttle. By any standard it’s a huge success; a triumph of science, technology and personal bravery plus a great symbol for the US — but the program will end this year and when it does 8,600 jobs will be lost.

The people screaming about the need for less government should be thrilled. Principle and absolutism win. We’re sure going to spend less.

The space shuttle program is a good example of government spending that generated enormous benefits.

What benefits?

When the space race began in the 1950s and 1960s the Russians had a tremendous advantage in rocket power. They could lift heavier loads into orbit.

But, clever folks that we are, we turned a liability into a plus. Since US rockets could not compete in lifting power we had to miniaturize the things we sent into space. That helped develop more efficient transistors, which lead to smaller and smaller electronics, which brought us to cheaper and more powerful computer chips, and that lead to the first personal computers.

I’m glad things are going well for the upper crust. I’d also be happy if things went well for the lower- and middle-class and toward that end the constant pressure to shrink the federal government makes no sense. Just ask any mortgage-paying shuttle worker facing layoffs; or the neighbors who will see home values go down as foreclosures increase as a result of the NASA job losses in Texas and Florida; or the local governments who will now be faced with both reduced property and income tax collections as well as higher costs for unemployment and welfare.

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Residual income is a big one.

This is a unique credit and underwriting guideline that applies only to VA loans.

At the outset, it’s important to differentiate residual income from a debt-to-income ratio. Unlike conventional lenders, VA lenders are only concerned with the “back end” ratio, which considers total monthly debt and income. The DTI ratio standard for VA loans is currently 41 percent.

But DTI ratios take a back seat to residual income in the world of VA loans.

So what is residual income?

Essentially, it’s how much money is left over each month after borrowers cover major expenses, from housing and taxes to debt payments. That remainder is meant for things like groceries, health care, gas and all the other trappings of consumer and family life. The VA wants to ensure that a veteran has enough money left over to take care of regular household and family needs.

Prospective borrowers have to meet a specific residual income threshold, which varies depending on family size and geography. Here’s the VA’s table for residual income:

For example, an Ohio family of four must have at least $1,003 left over each month after paying their major obligations. The residual income levels are a bit higher in the Northeast and the West, each of which has a higher cost of living.

There’s also a direct link between residual income and debt-to-income ratios, one that’s geared toward protecting veterans from becoming financially overleveraged.

While DTI ratio and residual income are separate standards, they are connected in a key way: A prospective borrower whose DTI is greater than 41 percent has to meet a higher threshold when it comes to residual income. In those cases, the borrower’s residual income must exceed the regional requirement by at least 20 percent.

So, returning to the Ohio example, a family of four with a DTI above 41 percent would need a residual income of at least $1,203 in order to satisfy the VA.

Neither residual income nor a high DTI are supposed to automatically trigger loan approval or rejection. But prospective borrowers who can’t meet the residual income requirements will be hard-pressed to secure a VA loan.

And that’s actually a good thing. Standards like this are one of the main reasons VA loans have thrived in the face of foreclosure. It’s an additional layer of scrutiny and protection that helps ensure military borrowers have the ability to meet their financial obligations when it comes to buying a home.

___________________________________

About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

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The answer is “yes” and this should be good news to a lot of people in a changing work environment.

HUD guidelines say the requirements for an FHA loan do “not impose a minimum length of time a borrower must have held a position of employment to be eligible. However, the lender must verify the borrower’s employment for the most recent two full years. The borrower also must explain any gaps in employment spanning one month or more. To analyze and document the probability of continued employment, lenders must examine the borrower’s past employment record, qualifications for the position, previous training and education, and the employer’s confirmation of continued employment. A borrower who changes jobs frequently within the same line of work, but continues to advance in income or benefits, should be considered favorably. In this analysis, income stability takes precedence over job stability.”

HUD Requirements

First, the lender must look at the last two full years of employment. For this reason it would be smart to have tax returns available for the last three years.

Second, HUD not only wants to know that you now have a job, it also wants some sense that FHA borrowers will have a job in the future. A resume should help but a caution: Make sure your resume is entirely accurate. Claiming degrees, certificates and employment you don’t have could lead to big problems. Have references for every job and qualification you claim.

Third, notice that job tenure by itself is not an issue. You don’t get points working at the mill for 20 years versus a new job every six months. You could have a bout of unemployment. The key issue is income stability, a polite term meaning regardless of how often you get a new job or whether you’ve been unemployed that you continue to make required payments to creditors. If your credit is strong then you can show suitable income stability.

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When you refinance a mortgage you replace an existing loan with a new one. There’s no need to negotiate with the old lender because his mortgage claim will be extinguished. However, borrowers with toxic loans need to see if a refinance will set off claims for a huge prepayment penalty at closing, perhaps an amount equal to mortgage interest for six months.

Mortgage Modifications

Mortgage modifications come in several forms. First, we have loans which automatically self-modify — that’s the nature of an adjustable-rate mortgage (ARM).

Next we have mortgages where the lender voluntarily agrees to modify loan terms. Given that a mortgage is a contract such voluntary modifications are rare. Voluntary modifications might include changes in rates and terms, and also assumptions where one borrower takes over the debt of another with permission of the lender.

Tough Times

Because of the foreclosure meltdown we now have government-organized modifications under the Making Home Affordable program. In basic terms such modifications are open to those facing foreclosure or who have lost so much equity that financing to a new and lower rate is now possible outside the program.

Owners Versus Investors

When principal balances are reduced it’s possible for investors to face federal taxes on the unpaid balance, money that’s regarded imputed income. For example, if a $100,000 mortgage is settled for $75,000 then the unpaid $25,000 has traditionally be considered taxable income under federal rules. However, if the loan being modified is for a personal residence, then under Mortgage Forgiveness Debt Relief Act of 2007 the amount forgiven is generally not be taxed by the federal government. For specifics, please speak with a tax professional and be sure to ask about both federal and state policies.

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“Fully 24% of people with mortgages believe they owe more on their mortgages than their homes are worth,” says Harris. “One in nine homeowners (11%) with mortgages report having ‘a great deal of difficulty’ in paying off their mortgage. Another 18% are having ‘some difficulty.’ This comes at a time when two-thirds of all adults (65%) are concerned that their families’ incomes ‘will not be enough to cover all their costs and expenses this year.’

Anyone who thinks the recession is over and done has obviously not spoken with the majority of people with mortgages — that 65 percent — who worry that their income may be insufficient to meet their costs.

Harris also found the following results:

• Over two-thirds (69%) of adults who are homeowners have a mortgage that they need to pay off.
• People whose homes are believed to be worth less than the money owed on their mortgages are common across all income groups. Fully 26% of adults with mortgages who have household incomes of $75,000 or more believe their homes are worth less than the balance of their mortgages.
• Almost a third (29%) of adults with mortgages are having some difficulty (18%) or a great deal of difficulty (11%) paying off their mortgages.
• Among those who believe their homes are worth less than their outstanding mortgages, fully 26% are having a great deal of difficulty and another 23% are having some difficulty paying them off.
• The two-thirds (65%) of all adults who are concerned about having enough income to cover all their costs and expenses include 26% who are very concerned and 39% who are somewhat concerned.
• Among those who believe that their homes are worth less than their mortgages, fully 42% are very concerned and another 38% are somewhat concerned about not having enough income to cover their costs.
• Unsurprisingly, income levels make a big difference. Concerns about not having enough income to cover costs and expenses is much higher among people with household incomes below $35,000 (40% are very concerned) than among those with incomes over $75,000 (16% are very concerned).

“These findings,” says Harris, “underline the very large number of people whose homes are worth less than their outstanding mortgages and the even larger numbers who are worried about covering their costs and expenses generally. If the percentages are converted into numbers, approximately 27 million adults believe they are “under water” — that their houses are worth less than their mortgage debts.”

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The government is now trying to stop this problem by requiring lenders to get necessary paperwork up front. This is a smart idea — and it also leads to an important point: Borrowers always want to know what paperwork they’ll need for a loan application so here’s a quick and handy list.

Consumer Debts

You plainly need a list with account numbers, current balances and required monthly payments for all debts, including but not limited to student debts, car loans, credit cards and other outstanding obligations.

Assets

You must show all assets including but not limited to savings accounts, mutual funds, stock, partnership interests, real estate and other assets.

Income

Below is the income documentation list that HUD is requiring for borrowers who are seeking to avoid foreclosure through the government’s making Home Affordable program. While the requirements below may not work for every lender, the list is an excellent start and shows what lenders are likely to require when you apply for a mortgage.

Employment Income

Copies of two recent pay stubs, not more than 90 days old at time of submission, indicating year-to-date earnings.

a. Servicers may accept pay stubs that are not consecutive if, in the business judgment of the servicer, it is evident that the borrower’s income has been accurately established.

b. When two pay stubs indicate different periodic income, servicers may use year-to-date earnings to determine the average periodic income, and account for any nonperiodic income reflected in either of the pay stubs.

c. When verifying annualized income based on the year-to-date earnings reflected on pay stubs, servicers may, in their business judgment, make adjustments when it is likely that sources of additional income (bonus, commissions, etc.) are not likely to continue.

Self-employment Income

The most recent quarterly or year-to-date profit and loss statement for each self-employed borrower. Audited financial statements are not required.

Other earned income (e.g., bonus, commission, fee, housing allowance, tips, overtime)

Reliable third party documentation describing the nature of the income (e.g. an employment contract or printouts documenting tip income).

Benefit Income (e.g., social security, disability, death benefits, pension, public assistance, adoption assistance.

Evidence of:

(i) the amount and frequency of the benefits such as letters, exhibits, a disability policy or benefits statement from the provider, and

(ii) receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If a benefits statement is not available, servicers may rely only on receipt of payment evidence, if it is clear that the borrower is entitlement is ongoing.

Unemployment Benefits

Evidence of the amount, frequency and duration of the benefits (usually obtained through a monetary determination letter). The unemployment income must continue for at least nine months from the date of the application. The duration of benefit eligibility — including federal and state extensions — may be evidenced by a screenshot or printout from the Department of Labor UI benefit tool, which is available at http://www.ows.doleta.gov/unemploy/ben_entitle.asp.

Rental income

Rental income is generally documented through the Schedule E –Supplemental Income and Loss, for the most recent tax year.

a. When Schedule E is not available to document rental income because the property was not previously rented, servicers may accept a current lease agreement and bank statements or cancelled rent checks.

b. If the borrower is using income from the rental of a portion of the borrower’s principal residence, the income may be calculated at 75 percent of the monthly gross rental income, with the remaining 25 percent considered vacancy loss and maintenance expense.

c. If the borrower is using rental income from properties other than the borrower’s principal residence, the income to be calculated for HAMP purposes should be 75 percent of the monthly gross rental income, reduced by the monthly debt service on the property (i.e., principal, interest, taxes, insurance, including mortgage insurance, and association fees, if applicable.

Alimony, Separation Maintenance, and Child Support Income

Borrowers are not required to use alimony, separation maintenance or child support income to qualify for HAMP. However, if the borrower chooses to provide this income, it should be documented with:

(i) copies of the divorce decree, separation agreement or other legal written agreement filed with a court, or a court decree that provides for the payment of alimony or child support and states the amount of the award and the period of time over which it will be received, and

(ii) evidence of receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If the borrower voluntarily provides such income, and that income renders the borrower ineligible for a HAMP offer, the servicer is allowed to remove that income from consideration and re-evaluate the borrower for HAMP eligibility.

20% Threshold for Passive and Non-Wage Income

Notwithstanding the foregoing, passive and non-wage income (including rental, part-time employment, bonus/tip, investment and benefit income) does not have to be documented if the borrower declares such income and it constitutes less than 20% of the borrower’s total income.

Non-Borrower Income

Servicers should include non-borrower household income in monthly gross income if it is voluntarily provided by the borrower and if, in the servicer’s business judgment, that the income reasonably can continue to be relied upon to support the mortgage payment. Non-borrower household income included in the monthly gross income must be documented and verified by the servicer using the same standards for verifying a borrower’s income.

Association Fees

If a borrower has indicated that there are association fees, but has not been able to provide written documentation to verify the fees, the servicer may rely on the information provided by the borrower if the servicer has made reasonable efforts to obtain the association fee information in writing.

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