Tuesday, July 31, 2007

Mortgage Matters

Today is the initial installment of Mortgage Matters, where I will discuss a wide range of topics covering all aspects of the mortgage market. Our first discussion topic is debt-to-income ratios.

The Debt to Income Ratio:

First, we need to determine what goes into creating your debt to income ratios. The “debt” portion of debt to income covers only the payments you make on a monthly basis for installment loans, revolving debt, such as credit cards or lines of credit (for credit cards and lines of credit the minimum monthly required payment is used), and monthly payments for child support and/or alimony. It does not typically include your monthly utilities such as gas, water, electric, cell phones, cable/satellite television, or internet charges. It will also not include daily living expenses such as food, gas, clothing, or entertainment.

The income portion of your ratio is based on your gross income. This is the income you receive before taxes or any other subtractions to your paycheck are made. For example:

John makes $11.00 an hour and works a normal 40 hour work week with no overtime or bonuses.

His income calculation would be $11 X 40 hours X 52 week a year / 12 months = $1906.66 monthly income, before deductions. This amount is the income used to determine John’s debt to income ratio.

Note: If you are self-employed, make a large portion of your income on commission, overtime, or bonus your income is determined differently from above.

Now that we have determined how mortgage lenders determine your debt and your income we can look at how the look and use debt to income ratios. Mortgage lenders use two types of debt to income ratios when reviewing a mortgage application. The first ratio, often referred as the “housing to debt ratio” or the “front ratio”, is the housing to debt ratio. This ratio looks at what your new mortgage payment you are applying for versus your gross income. The industry guideline is that your front ratio should not exceed 28% of your income. So using John as an example:

John’s monthly income is $1906.66, if his proposed mortgage payment is $500 per month, including taxes and insurance (wouldn’t that be nice), his front ratio would be 26.22%. This payment would fit into the industry guideline, but just barely. The max payment to meet this guideline for John would be $533.86 per month.

The second ratio taken into consideration is called the total debt to income ratio, also known as the “backend ratio”. This ratio takes your proposed mortgage payment and any other monthly debts you may have (see above). The normal industry guideline varies slightly depending on the type of mortgage loan you are doing but typically the ratio should not exceed 36%. So referring to John again:

John has a proposed mortgage payment of $500 per month, his car payment is $250, and he has minimum payments on his credit cards of another $50 per month for a total of $800. If his income is $1906.66 per month his back ratio would be 41.96%, which exceeds the industry guideline.

Are John’s dreams of an affordable mortgage cooked? No, not necessarily. More on that to come!

Monday, July 30, 2007

Continuing to Build

Ok so maybe my portfolio is going to be larger than 10-12 picks. The initial five picks of PG,PEP, LVS, F, & ABX were all up today. Much like everything else for that matter but Ford did pace the way with a gain of 6.2%. This jump may have been because of a Saturday report that Ford may have a potential bidder for their Jaguar, Land Rover, and Volvo brands but this may be a short lived rumor. Barrick Gold (ABX) and Las Vegas Sands (LVS) also made nice gains of 4.07% and 3.01% respectively.

Not a bad start. But notice that none of these choices is overly aggressive. The market has been unsteady at best, swinging violently in the last few weeks, with the end of last week being particularly ugly. I'm avoiding Financials altogether at this time. With the possibility of the end of the Leveraged Buyout boom looming and the subprime mess, it's just not the place to be.

My three new picks for my portfolio are Allergan (AGN), Quest Diagnostics, Inc (DGX) and Transocean (RIG).

There are just no wrinkles to Allergan, the maker of ever so famous Botox wrinkle treatment. They just split their stock in June and are going to be seeing increased competition in the Botox arena from the likes of Johnson & Johnson but for now the company should be able to meet or exceed expectations for the quarter based on the sales of Botox and their acquisition of Inamed, a maker of obesity treatment device and a line of breast implants. Now you can have wrinkle free breast implants!

Quest Diagnostics is a provider of diagnostic testing. It does so by offering physicians access to it's network of diagnostic laboratories. It also does gene-based testing and testing of drugs for abuse. Second quarter earnings were slightly above expectations and the company raised their bottom line estimate for the year. Wall Street estimates only match the companies bottom number. I feel that the company will easily match and beat analyst estimates for the rest of the year based on cost cutting measures and acquisitions.

Transocean (RIG) is drilling for the black gold, the black gold that is in the deep water. In fact, they are the best at it. It recently announced a merger with GlobalSantaFe to create a company that can drill shallow to ultra deep water all over the world. Now the only scary part in this deal is the 15 billion in payouts to shareholders that is being financed through a bridge loan. We have seen recently with Chrysler that financing is getting a little harder to do. This is a good marriage and we should be able to reap the benefits in the near future.

Saturday, July 28, 2007

Welcome to the Financial Bullet!

Well hello. Thanks for stopping by. This is the initial post for my financial blog, the Financial Bullet. The goal of my blog is going to be two-fold. In Mortgage Matters, I will discuss the state of mortgage lending, builders, real estate agents, the home buying process, and tips in general regarding everything mortgage. I have been in the mortgage arena for the last seven years and have seen a lot of things transpire all mortgage related and have learned how the rest of the stock and bond market and mortgage lending all are interconnected. From my experience and perspective, I should be able to give you a good overall idea of the mortgage market. The second part of this blog is going to focus on building a personal stock portfolio. This is an area that I think that I can be successful at, following the market on a daily basis, but I have never really tried to put it all together. I am going to share my ideas, successes, and very likely some awful failures. Today's blog post is going to focus on the latter, I am going to give my first portfolio picks.

My Guidelines

I am going to build my portfolio over the next few blog posts. My goal is to have a portfolio of 10-12 stocks at any one time. Why 10 to 12 picks? For starters I'm not a financial analyst, nor do I do this full time and following 10 or so stocks is going to take a good portion of my time. I may adjust my picks based on my comfort level and overall market conditions at any time. I should keep you updated when I decide to move in a new direction.

Enough Already! Let's DO Something

Building the Core

I have five for picks for today. Proctor & Gamble (PG), PepsiCo, Inc. (PEP), Las Vegas Sands (LVS), Ford (F), and Barrick Gold Corp (ABX).

It isn't a good week to start a stock portfolio, or smoking, drinking, or try to sell debt on the market. So my first picks are those companies that I feel are going to good to hold onto for quite some time, especially my first 2 picks.

Proctor & Gamble are set to report earnings for their financial fourth quarter next week. It looks to be a good report. PG pretty much makes everything under the sun. The business is broken up into 3 main product groups, Beauty & health, Household products, and Gillette. The make Tide, Febreze, Swiffer, and the list goes on and on. This is my anchor to this portfolio. I plan to hold this unless something extreme happens. People always need to clean clothes, diaper their kids (yeah they make those too), and shave. PG is pretty much cyclical proof.

My secondary anchor is PepsiCo, Inc. Sure, they had to admit that Aquafina is really tap water
but does that really surprise anyone? Not me. And will it stop people from purchasing Aquafina or bottled water in general (Aquafina certainly is not alone)? Nope. It won't make any difference. Bottled water is now part of the main stream. But will they them take those mountains off the bottle's label? PepsiCo released their most recent earnings this past week and raised their full year guidance. And their commercials say 56% of diet cola drinkers thinks Diet Pepsi has more cola taste.

Ah, how we love to gamble. Isn't that why we "play" the stock market? Las Vegas Sands fits our gaming needs. There seems to have been lots of discussion whether the Macau operation is going to be successful. But I don't think there is any question at all. Macua seems to be full steam ahead for the fall opening. And it seems the Chinese love to gamble too.

Ford posted a surprise profit of $750 million when analysts had been predicting an eighth straight quarterly loss. I have liked Ford for the last year or so. I am very high on CEO Alan Mulally who took over the reins from Bill Ford. There were plenty of questions about Mulally entering into the automobile market but it seems like the move is starting to pay off. The car maker has been successful with new models such as the Edge crossover and seems to be winning over some fans. Is this really the Fix Or Repair Daily Ford that I knew from my youth? The question really will be can they keep this up?

My final pick is Barrick Gold Corp. This may the riskiest of my picks (believe it, I think gold is more risky than Ford) but with the dollar still falling lower almost everyday it seems I think having exposure to gold is still a good thing. I know that this might not be the best hedge since gold has been on a tear in the last few years but I think mining companies such as ABX which is the world's largest producer of gold bullion but in general still may be good. ABX releases their quarterly earnings August 1. I'll revisit them shortly thereafter.