A new friend of mine just joined Active Rain. His name is Kody King, and he works for Springwater Capital.  He and I recently were in a meeting together and he introduced me to a sales concept that he put together called the Jelly Bean Marketing Plan.  It's really very simple, but effective in terms of the way it's designed.  And I won't ruin his blog by talking about the details, but if you get a chance, please check out his blog.

Kody King, the Jelly Bean King

I've always been impressed how certain people can get away at times with elaborate flim flams.  The recent arrest of Bernie Maddof is one such demonstration of this type of fraud and those who are duped.   Normally it requires a mark, or victim, who is manipulated by their greed, honesty or compassion.   Often these schemes are elaborate and can be perpetuated by the innocent and masterminded by those thinking they are providing others some type of better existence.  Meanwhile capitalizing in the beginning with massive profits, which later leave their unknowing victims in bankruptcy or foreclosure.

This scenario is relevant in regards to the Mortgage Merge Account.  Hailed as some great innovation brought to us by the land down under, it has turned into a nightmare that strangles many of it's victims.  Offered by neighbors, friends and relatives, the victims think they are following the council of family or religious leaders by eliminating their mortgage.  In reality they are creating the seeds of their destruction.

It all started the summer of 2006 in my home state of Utah.  A group of average mortgage originators decided with the help of a couple insurance guy's to adopt a growing underground movement that used debt against debt.  Yep, you heard that correctly.   You take additional debt to leverage down the longer term debt you receive when getting a mortgage.  The best way at the time was to get a equity line from the bank and then pay a nice salesmen $3500 dollars, which of course you could slap on that same Equity line, and now a little graph you could see on a web page would tell you when to pay your payment, how much to pay, and when you would be free!!!  Wow....just $3500 and you didn't even have to really take it out of your checking account to do it!!  Cool!!!   Oh, and that small rainy day fund you have, you really don't need it, just put it in with the Equity Line and the software will help you pay your home off that much faster.  Oh yes, did I forget to mention....you can make extra income by selling this to others as well.....oh your not a mortgage lender....no worries, anyone can sell this and isn't it wise to help others pay off their mortgages earlier.

Yes indeed, paying off the mortgage had become more important then curing cancer.  The mortgage was evil and a vile hinderance to retirement and it should be taken out at any cost.  We'll that's a slight exaggeration, but so did the salespeople who pitched the MMA product.  Hey Mr. homeowner, you don't even have to CHANGE, just keep what you doing now, and you'll have that house paid off in 8 years!!   Yes, it did sound too good to be true, and even a mortgage professional like msyelf was taken in for a short time.

But like most confidence games, circumstances can quickly change.  Either it's a ponzi scheme and the organizer of the fraud runs out of new investors to pay the returns on the old investments and it collapses, or market changes swiftly cause the collapse of the fraud and the "mark" is left holding the bag.   Guess what's happened to these MMA programs, there now crashing and burning.

What most people didn't realize is that the MMA couldn't predict future real etate markets.  It's not a bad idea if the market is perpetually increasing each year.  But you have one or two severe downturns, or an extended downturn of more then 20%, and look out!   Now these same people who thought they had accumulated a 100k in savings and equity are now just staring at an empty wallet and bank account.   Their good friend has long since stopped selling the snake oil.  They're probably already invited you to attend some meeting they know nothing about, but it's cool and you should just check it out....(oh yeah...it's not just soap....it's SUPER soap!!"

So now your $3500 is long gone.  You actually owe now a first and a HELOC that has been converted to a second mortgage because your in a declining market and the bank closed your equity line!  Your also probably worried about losing your job and realizing that you have little in your reserves because you've needed them to fund your massive mortgage payment!   Yes the confidence man struck once again, and now your one of those guys you read about in the paper, oh and someone is trying to deliver you papers from your wife who moved out a few weeks ago....oh crap!

You open up your credit card statement and your shocked to see that your credit limit has been reduced to what you currently owe! Or worse, your American Express card was just declined due to your credit limit being limited (and you thought AMEX didn't have a limit).

As the economy continues to slide off a proverbial cliff, credit card companies/banks are looking at record default and bankruptcy.  Their taking swift action to shore up their losses, and they may end up doing it at the consumers expense.

Credit Reporting has become a science, and the "evil" empire, Transunion, Experian and Equifax have created companies that have created the current system that banks use to analyze risk. You most likely have a credit score, and unless you live under a rock you know that having a 700 plus score now days is a must.  The problem is there are several scores that the your are not privy to, and these scores are where the credit card companies are ambushing their clients.

The first culprit is called the Bankruptcy score.  This score evaluates the likely hood of any of their clients risk of falling into bankruptcy.  With over a million bankruptcy's in 2008, this number is bound to explode in 2009 with the deteriorating job market.  As your probably can deduce, these scores are going to be looked at even more closely in preceding months.  If your mysteriously cut-toff from your available credit, it could be a number of factors, the most likely being that your considered a high bankruptcy risk.  This can happen even if you have no late payments or other risk factors that normally are considered important.

The problem with this system is that you the consumer have no rights in terms of knowing the factors used to determine your bankruptcy risks.  Unlike many of the consumer friendly models, the Credit Bureau's are digging in their heels and refuse to release specific factors regarding how they make these determinations.  The results can be devastating, from frozen credit accounts to higher interest rates, the consumer is left in limbo as to why and how their situation was made even worse.

What's even more alarming is the scoring model that is called "transactional scoring".  If you use your credit cards at Nordstroms, then use them for cash advances or Walmart, the transactional score could alert your creditor that you maybe using your credit to mask cash flow issues.  The creditor then responds and freezes credit and raises rates.   What's tough for the consumer is that they could be just fine financially, but the transactional score, normally reserved to detect fraudulent activity, is now used to determine if your a risky credit user.

I hope this makes you mad as a consumer, because the credit card companies and credit scoring companies are employing ever trick in the book to keep their system secret.  Consumer groups have fought for years to force the Credit Bureau's to provide some type of accountability to consumers in regards to reporting errors.  But Banks and the credit reporting system is in for the fight of it's life right now, and the old rules of fair play maybe just ignored as they scramble to plug the dike.

If a score is used against you for any reason, you should have a right to see that score, know how it was calculated and protest any errors in the data used to calculate it.  Therefore you need to contact your US Senator or US Congressperson and let them know that , Experian, Trans Union and Equifax need to change their disclosures and include consumers.

You also need to speak to someone who is well versed in credit law and reading credit reports.  Not all mortgage professionals understand credit, and you may need to search in your community for someone who understands the "credit game" as I call it.  There are a number of excellent of online sources as well, including the one your reading.

My first post on this subject outlined the main challenges we'll be facing in the next 5 to 10 years.  Now I'm going to start focusing on each of these challenges one at a time.  I enjoy reading the responses by my readers, and one exchange in particular spurred me to write this follow-up.

Homes of the future may begin resembling homes of the past.  In other words, if you've ever traveled through older neighborhoods, look at the home sizes as you progress through the decades.  1930's-40's you see cottage style floor-plans, 2 bedrooms, 1 bath, kitchen, living area and basement of similar size.  It's rare to see more then 2 bathrooms in these type of homes. Then in the 50's and 60's, floor plans became slightly bigger and the ranch style floor plan came into style, with 3 bedrooms, 2 bath's on the main-floor.  Multilevel homes began to surface again, but actual average square foot above grade was not much different then your ranch style single level home.

The 1970's and 80's brought the multi-level plan into vogue.  Designed to fit within the footprint of a ranch or rambler, these new designs added bedrooms and utilized basement space more efficiently.  I think part of the attraction to this design was that actual above grade square footage was less then the traditional two story home. Then in the late 1990's and early 2000's, homes sizes began to increase.  Custom homes became the rage, with designs expanding beyond the basic ranch footprints. 

Then land speculation hit it's zenith in 2004, and lot's were developed at record rates.  Every increasing building costs, coupled with ridiculous land speculation, and builders were almost forced to build bigger and bigger homes.  These were not necessarly better designs, but they were filled with "extra's" which would allow the builder to actually make some type of profit.  I don't think the small builder/contractor necessarily became rich in the mid-2000's, but were forced due to the market to produce these giant homes that no one wants now.

So where do we go from here?  The reality is going to be a tough one for many to accept.  Luxury homes are a thing of the past.  Yes, your mega-millionaires will still be buying these homes, but the average Joe is done paying the mortgage, the huge utilities, and excessive taxes.  The impact on communities is going to shattering, with reduced property tax revenue, and future planning that will have to be modified.

Environmental concerns are not going away with reduced demand.  In fact you will see energy efficient designs become even more desired as we progress into the next decade.  "Green" living is becoming more in vogue, and not just for the environmental impact, I think many will see this as a more efficient way to keep utility costs down.  I also envision future developers also including "alternative power" options as ways to help bring costs down for builders and home owners.  I wouldn't be surprised to see future neighborhoods that partner with Wind Farm's, Solar farms, or other future alternative energy coops.  Your also going to see local governments clamp down on landscaping, especially in the drought Southwest. 

I also wouldn't be suprised to see that builders add many high end conservation features to homes in the future. Recycleable water, alternative energy with optional supplementation from the normal power grid.  I can imagine that wood and coal burning stoves will come back as an industry, especilally outside major metropolitian area's where smog controls rule these out. 

Therefore, instead of Granite counters and huge cathedral ceilings, your probably going to see tightly designed square foot homes, designed to save money in regards to heat, electricity, and maximize water conservation.  I'm sure aesthetic value will still be necessary, but the Japanese and European home designs will now become a staple in the US market. Build them smaller, build them cheaper, build them efficient will be the new motto.

I am constantly reading and researching for myself and the clients I serve, and I've come to some rather grim conclusions, sprinkled with some hopeful solutions.  Currently we are witnessing the greatest financial meltdown in world history.  It's not just a maybe anymore, it's a guaranteed certainy.  Those whom have stood like a deer in the headlights need to start moving towards where the money is going to be.

First let's establish some salient facts before we all drive off the edge of the cliff.

• The US dollar is going to collapse in the near future.  The Dollar has been severely overvalued, and the flight into US Bonds is soon to reverse.  When China and the other large bond holders begin liquidating, this will cause a catastrophic loss in the US dollar.  Which means food and energy costs are going to shoot through the roof.  Therefore energy friendly communities, farming communities will be the new hot markets for jobs. With jobs come needs such as housing and financing.  The big question is how solvent will US banks be in this crisis, and counting on wholesale banks is a thing of the past.  We're either going to have to encourage private funds (like real estate opportunity funds) or we're going to have to rely on smaller regional banks.  The big banks are dead or nearly dead, and if you want a government job, then perhaps CITI will be still hiring.  But underwriting times will probably be outrageous, and smaller banking entities may turn out to be the real winners.

• Interest rates are about to explode.  Will it be considered hyper-inflation, like a third world country.  That depends on what the federal reserve does when the dollar begins its fall.  If they react with higher rates, despite the fact that the economy is in decline, then we may avoid the excesses of hyper inflation.  But if they leave the rates where they are, or they continue to use government to buy up mortgage back securities, and keep rates at 1.00% or lower, then watch out!  What are we going to do if rates go up to 1981 levels, 18-21%?  Your going to have to sell real estate in non-traditional ways.  Private seller financing will not be the option of last resort, it's going to be the option of first resort.  Thousands of home owners that have capitalized on lower rates stand to be in a good position when hyper inflation hits.  It's going to be important to have extensive data bases of home owners with 4.5-5.5% rates.  These home owners will still need to buy and sell homes, and cooperative enterprises that can transact exchanges will be the hot real estate networks of the next 10 years.

• Green Housing will now become economic housing.  In other words, energy efficient housing will be more valuable then gold.  Energy costs will skyrocket, forcing homeowners to shut off their power for long periods of time.  Electrical and gas companies will continue to reward consumers for buying energy efficient products, and consumers will be looking as solar, wind and other ways to decrease consumption.  Builders will be building small efficient homes, and luxury items will truly be just for those whom can afford them.  No more jetted tubs, expensive tiles, wood floors, or other excesses you see in many American homes.

• Community Housing will also become more common.  Generational housing will be the thing to do, where grandpa and grandma move in to help reduce costs for both families.  Many immigrants already practice this to some degree.  Now you will see the majority populations whom have been used to one family living now consider ways to decrease costs through community living.

Real Estate will evolve with the market and I imagine that will be a difficult adjustment.  But in the end I still am optimistic that America will eventually pull itself from the ashes.  The current form of consumerism has not worked.  The idea that you can simply spend and spend and spend without consequence will soon shift to a more conservative public policy of savings and thrift.  The key to survival in the real estate industry is creating the strategies that will take advantage of these ever changing economic conditions.  Those who capitalize now will be the great successes of the future.

End of the world predictions have been around for years.  From War of the Words, to global environmental collapse, you've probably watched one recently.  I've always loved these movies, even though the premise is often ridiculous and unrealistic.  Now that the economy is crashing, millennial and end of the world stories are picking up in frequency.  Do any of these stories hold a shred of validity?  If the end of the world (as we know it) is at hand, then should we be getting ready?  Is it too late?  Is 6 months food storage, and 10% of your asset's in Gold and Silver going to forestall the bitter end?

The other day I ran across and essay written by Martin Armstrong, I've linked to it, because it's a prime example of what I referred to as "end of the world" scenario's.  If you do a google search on Martin Armstrong, you'll find that he's currently serving time for some Japanese stock scam.  Now once you get past the initial (well he's a criminal so why believe him), you'll find that his arrest and detention is controversial.  You'll also find that his predictions about where the market is heading is spot on.

The question I have is that Martin is one of many who are issuing the alert that we're in troubling times.  The fact that the talking heads on CNBC and Fox Business are wringing their hands and have no answers.  Politicians are flailing about and think pouring good money into bad debt is the answer to our problem.  The reality is that this latest stimulus package is going to do nothing. 

Is Armstrong correct, are we in the midst of a 26 year bear market?  Are other doom and gloomers correct, is this the last gasp of the "American Empire", much like Rome in 300 AD?   I won't say that I know anymore.  I've attempted to be positive and claim this is only a temporary bump in the road.  The bump is now a large hill, and could become a mountain soon.   But is the end of the world at hand?  Who can say for sure, but I'm hoping for an Economic recovery in early 2010, BUT I'm going to stop being an idiot, and begin preparing for the worst case.

Even if you are prepared for the worst case, can you really survive for long?  Actually the best action would be to take a proactive role in stopping the insanity.  Many of Armstrongs suggestions in his essay are ones we could get behind politically.  The one that makes the most sense to me is the concept of a National Sales Tax.  The reailty is that we can't borrow for ever as consumers, we can't borrower forever as goverments.

Call your congressmen, ask their staffers why they don't support a national sales tax?  As them why they think taxing the top 1% of income earners is fair or even prudent?  Ask them why we're providing corporate welfare to GM, AIG and the banks?   Ask them why don't they form a public trust for all the toix mortgage debt?  It's time to take these people to task!  We elected them, we can hold them to account.  So Google your Senator and congressperson and CALL THEM!  Then get invovled in your community, save some money, get some food storage, and pray that we figure it out in time.  American's can do some amazing things when the chips are down, and I believe that this isn't any less true then anytime else in our history.

Often you hear different theories in regards to where real estate values should be.  The reality is often different then what one may hear.  For years I've been under the impression that real estate is a function of supply and demand.  You have a certain number of homes, and a certain number of buyers, and that will dictate value.  There may still be some truth to this theory, especially when you look at over built Florida, California, Nevada and Arizona.  But is it really just an issue with supply and demand?

Could the real issue be income?  That's right, what you claim on your taxes each year.  Income pure and simple is the barometer of what housing values should be in the United States.  Until the late 1990's and early 2000's, income had been used primarily to determine a borrowers ability to pay their mortgage. With the advent of stated income loans, this barometer was chucked out the window, and we're now dealing with the aftermath of this mistake.

So how do you determine values and what should be a red flag when looking at real estate?  Good questions, and there of course is more to evaluating a house then this simple formula, but this you may want to use as a baseline in evaluating real estate in the future.  Most experts agree that one should take the median income in a particular region, and then find out what the median real estate values are for that same area.  If the real estate values is greater then 2.8 times the medium income, then the property is in what most would consider a real estate bubble.

Example, in the state of Utah, 2008 real estate values in October were $218,000 for the state of Utah.  However, the median income level was just below 59,000.  If you take the income level, and times it by 2.8, you come up with $165,000.  This would suggest that values are 25% higher then income levels in Utah as a whole.  This of course is statewide, and each region in the state is going to be somewhat different, but as a whole you can see that values are still not in line with income.  The other factor that has not been computed yet into these raw numbers is the shift in income that will occur in 2009.  Many Utah jobs were related to the construction, real estate and mortgage industries.  The median income number will most likely fall again from it's high in 2007 of $63,000.

So what does this mean?  It means that Salt Lake and Utah values may continue to slide in 2009.  I wouldn't be surprised to see an adjustment of 15-25%.  The closer you get to the 2.8 factor in relationship to income will determine which housing values will drop the most.  Those homes that are 5 to 6 times median income levels may suffer the most.  I think Salt Lake's employment situation may save it from dropping 25%, but a 10-15% further adjustment maybe in line before normal real estate conditions can take place.

My wife and I have 5 children, and at this point we've decided that this is enough.  As many women know, breast feeding children can have debilitating effects on their breast tissue.  Breast augmentation is one of the more popular solutions to this issue, (one that I endorse!!).  But if you do a Google search on breast implants or augmentation and you'll be besieged with a plethora of procedures and options.  I've noticed that prices vary from $2000 to $6000 dollars, some doctors want the money all up front, there are a few that will take payments.  Some of the Doctors spend copious time explaining the process and educating their client, others it's just a cut and tuck procedure.  This is starting to sound familiar isn't it?

Yep, the mortgage industry is much like getting implants. But it can have a much higher impact on your financial health then breast augmentation.  One cost's you 2-6k total, the other could put you into foreclosure or bankruptcy.  The problem is that most consumers think it's not any different than buying a box of corn flakes.  And if you ever have been to a car dealership, clothing boutique or Wal-Mart, you know why this is the case.  Retailers have been notorious when it comes to putting product on "Sale", or "Discount".  The oldest trick in the book is to set the regular prices at one point and drop the real price by 20%.  You don't believe me then go to Kohl's; I don't think I've ever not been there when there hasn't been a "special sale".

So if finding the right doctor for implant's is so important, then why don't consumers spend more time finding a mortgage professional that will make the same effort to educate their client.  I lay the blame squarely on the mortgage industry!  If you've watched TV or listened to radio it's pretty obvious that my industry is causing its own problem.  They're selling "RATE"..."RATE"..."RATE"...  The problem is rate is such a small part of the overall mortgage process.  What about fee's?  What about affordability?  What about liquidity?  What about resell ability?  These are all factors that are strangely vacant from most mortgage advertising.  We're no better than the Viagra pitches you see in your Spam account!

The reality is that there are a number of mortgage professionals that are changing the status quo.  I've met a number of these professionals on active rain.  Brian Brady, Jeff Belonger, Tom Burris, Jeff Sardi, and many others.  The problem is there are plenty of others whom seem to think that "RATE" is the solution to their borrower's troubles.  Much like recent dialogue concerning the purchase of mortgage backed securities.

My wife and I have 5 children, and at this point we've decided that this is enough.  As many women know, breast feeding children can have debilitating effects on their breast tissue.  Breast augmentation is one of the more popular solutions to this issue, (one that I endorse!!).  But if you do a Google search on breast implants or augmentation and you'll be besieged with a plethora of procedures and options.  I've noticed that prices vary from $2000 to $6000 dollars, some doctors want the money all up front, there are a few that will take payments.  Some of the Doctors spend copious time explaining the process and educating their client, others it's just a cut and tuck procedure.  This is starting to sound familiar isn't it?

Yep, the mortgage industry is much like getting implants. But it can have a much higher impact on your financial health then breast augmentation.  One cost's you 2-6k total, the other could put you into foreclosure or bankruptcy.  The problem is that most consumers think it's not any different than buying a box of corn flakes.  And if you ever have been to a car dealership, clothing boutique or Wal-Mart, you know why this is the case.  Retailers have been notorious when it comes to putting product on "Sale", or "Discount".  The oldest trick in the book is to set the regular prices at one point and drop the real price by 20%.  You don't believe me then go to Kohl's; I don't think I've ever not been there when there hasn't been a "special sale".

So if finding the right doctor for implant's is so important, then why don't consumers spend more time finding a mortgage professional that will make the same effort to educate their client.  I lay the blame squarely on the mortgage industry!  If you've watched TV or listened to radio it's pretty obvious that my industry is causing its own problem.  They're selling "RATE"..."RATE"..."RATE"...  The problem is rate is such a small part of the overall mortgage process.  What about fee's?  What about affordability?  What about liquidity?  What about resell ability?  These are all factors that are strangely vacant from most mortgage advertising.  We're no better than the Viagra pitches you see in your Spam account!

The reality is that there are a number of mortgage professionals that are changing the status quo.  I've met a number of these professionals on active rain.  Brian Brady, Jeff Belonger, Tom Burris, Jeff Sardi, and many others.  The problem is there are plenty of others whom seem to think that "RATE" is the solution to their borrower's troubles.  Much like recent dialogue concerning the purchase of mortgage backed securities.

This is a good question if you read today's headlines.  Jeff Belonger also wrote a great article about Deflation and Inflation and why we should be worried about a deflationary depression.  The big difference between 1929 and today is who will be in charge of the government over the next four years.

My worry right now is that we're actually going to see a inflationary spiral that we haven't seen except in third world countries in the 1980's.  When I was a teenager, I remember news reports of Argentina or Mexico going through incredible inflationary spirals.  I also remember studying post WWI Germany, and how some people had wheel barrels of worthless money at one point in that crisis.

The problem is we're heading that way ourselves.  Massive spending increases are fore-casted in the next few years.  Obama has an aggressive spending agenda, and then we're pouring Billions upon Billions into banks, auto makers and I have no doubt the government will continue to pump billions into this shaky economy.  But where is all this cash coming from?  It's not going to come from me and you, it's mathematically impossible due to the shear amount of obligations that are piling up each day.  The reality is they are going to PRINT the money and continue to PRINT until it finally catches up with us.

When you have an over supply of money you get inflation.  The difference between the Great Depression and today is that the government didn't spend massively until they were in the middle of the depression.  In this case we've been pouring trillions into the economy right from the onset.  Deflation will continue to exist until the American people feel more secure about lower prices, but then we need to be worried.  The MASSIVE public debt is going to be so overwhelming that we will be printing even more money to just pay the interest payments, and that's at all time interest rate lows!  Then inflation begins to bite down hard, because when things begin improving world wide, the the dollar becomes worthless!!  We don't have a manufacturing base anymore in this country, so low cost Walmart items will skyrocket, oil will sky rocket, and energy will skyrocket o nce again because of the lack of a long term energy policy.

My worry is we're setting the table for massive runaway inflation.  Recently I spoke to my father who's locked into his home in Boise Idaho, due to the declining market values.  At one point he thought he'd made a mistake buying instead of renting, but because he's a student of history he's now thinking he's in good shape for the future.  He has a 30 year fixed loan below 6% and if we do go through this hyper-inflationary spiral, then he's sitting in a good position in 3 to 5 years, and renters will be getting hammered with extremely high rental payments.

If I'm wrong and this economy degresses into a deflationary collapse, then I guess the result is not much different.  The problem is the public debt will not decrease, and we'll only have to pay it back with fewer tax revenue dollars.   The only difference is that you don't want to own a home until the deflationary collapse is hit rock bottom.  My bet however is that the media is going to do everything in their power to keep their president in power, and will make the classic mistake of painting a rosy economic picture, which in turn will get consumers to begin spending again, which for a brief period of time will seem like a strong recovery, and then we'll see all Hell break loose!