California Crossroads

California voters have put the state at a crossroads. Using Robert Frost's "The Road Not Taken" as an analogy. One is a road deeply trodden black from elections past, the other grassy and wanting for wear.

One road will echo the path of Washington the past eighteen months, the other provide the people with protection from reckless spending, higher taxes and continuing failed economic policies that have pushed our state, and nation, down the road of insolvency.

With our gerrymandered districts for State Senate and Assembly there is little chance the composite of the California Legislature will change. It will remain firmly in control of Democratic majorities, who will need just a few defectors from the GOP side to pass any budgets. Not needed will be any defections to pass mountains of legislation that impact businesses, daily life and continue the intrusion of the state into our lives.

Our government is set up with a system of checks and balances, you learned about them in high school, or should have. Unfortunately too many voters, most voters, do not appreciate their role in the checks and balances between the Legislature and the Executive. Having one party with a significant control over the Legislature and the Executive removes safeguards for extreme legislation.

In the primary election yesterday Meg Whitman secured the Republican nomination in a brutal campaign with mostly Steve Poizner. Whitman trounced Poizner but in the campaign he took more than an ounce of flesh. In a critical election, once again the California Republican Party shows no discipline, no cohesion and assists the Democrats with a close primary fight that wounds the winner financially and politically. Whitman having secured the nomination of the minority party must now unite not only the Republican Party but also enough Independent and Conservative Democrats (are there any in California) to upset her opponent. If Poizner truly cared about this election he would start today in congratulating Whitman on the race and work hard for her campaign for November--without his supporters the race is lost.

Whitman's opponent is no surprise. Spending perhaps $100,000 through the primary former Governor Jerry Brown secured the nomination in a landslide. Making no news, merely sitting back and letting the two Republican candidates pound the politics out of each other, Brown's campaign just ran their DVRs and recorded what a fellow Republican said about Brown's opponent. The Democrats kept any serious candidates out of the race allowing no spears to chink Brown's armor.

Jerry Brown is an open book. He will campaign as close to the center as he can get. He need not appeal to the Democratic base because he is the base: he defines liberalism in California as shown by his years in the Governor's mansion, Mayor of Oakland and more recently as Attorney General. His sole campaign strategy will be to appeal to Independents and the right-wing of the Democratic Party. Sound familiar to November 2008? Like then Senator Obama, Brown can leave his principles and ideology off the campaign trail and pick them back up when, if, elected.

Quickly looking down ticket it is a landslide for Democrats: Lt. Governor will pit Abel Maldonado (R) against San Francisco Mayor Gavin Newsome (D). Maldonado has angered many in the GOP with his vote to raise taxes last year; Newsome is Jerry Jr. with his liberal agenda and willingness to ignore the California Constitution for his own political gain and popularity.

Secretary of State Debra Bowen (D) will face unknown Damon Dunn and unless she is caught doing something illegal will cruise to victory, though depending on the illegal act California voters will probably ignore and transgressions and re-elect her anyway.

Similarly Treasurer Bill Lockyer (D) will face Mimi Walters in a race that should mirror the Secretary of State race.

Perhaps showing some competitiveness will be the race for Attorney General between Kamala Harris (D) and Steve Cooley (R). Cooley has a record that can appeal to the middle, but enough to defeat rising star Harris? He may not contain the GOP base, which would be a shame for that base if they do not support him, if not he goes down.

Governor, Lt. Governor, Secretary of State, Treasurer, Attorney General, at a minimum four of the five seats can, and probably will, go Democrat. Facing the "checks" and "balances" of a Democratic Senate and Democratic Assembly.

So the question Californians need to ask is this: Can our state afford having every statewide office plus the Legislature in the control of one party? If you answer "no" then you need to support Meg Whitman for Governor, not just with your vote but with your voice, your money and your relationships. If you answer "yes" then just sit back and wait.

I shall be telling this with a sigh

Somewhere ages and ages hence:

Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.

Excerpt from "The Road Not Taken" by Robert Frost

Will California take the one less traveled by?

DCS06092010

Joe Friday Interviews President Obama

He brought us "just the facts, ma'am" now he comes back to life to interview the President.

DCS06082010

More Jobs On Your Payroll

On Friday the Labor Department released employment figures for the Month of May. To those who just read the headlines the news was fantastic, 431,000 net new jobs in the economy. Unfortunately headlines are not news, except to the lazy and continuously uninformed. Beyond the headlines we learned that the actual number that should have been highlighted by news publishers was 41,000. That was the number of private sector jobs created in May.

Of the 431,000 jobs created 411,000 were temporary Census workers hired by the Federal Government. And according to some reports the Census is firing workers and then re-hiring them to pad their employment reports (NY Post, Neil Cavuto, CBS Sacramento). So we do not know is if the 411,000 being touted as new hires by the Census are representative or inflated. Keep in mind that to count as a new job the Census Bureau must hire someone to work one hour in a month. Sounds like unemployment to most people but not the Labor Department.

What gets lost in these numbers are the payments these workers receive, the cost to train them to knock on doors and say "How many people live here," are paid by taxpayers. Taxes that come from public sector jobs are just recirculating dollars within the government sink, taxes that come from the private sector are adding new water to the sink--water to replace that which has gone down the drain.

With only 41,000 new jobs in the private sector supporting 411,000 new jobs in the public sector it seems well continues to run dry to support expanding, or even current levels, of government employment. Meanwhile the majority in Washington (and Sacramento, Albany, Springfield...) and the Chief Executive feel more spending will create more jobs. This may be so on a very limited basis if any spending is actually being done to create private sector jobs, but that is not what has occurred or what is planned to be spent next.

Government spending to stimulate the economy is referred to as Keynesian Economics, after economist John Maynard Keynes. Keynes' philosophy of government fiscal policy to stimulate an economy was very popular with Western governments after World War II and the policies seemed successful as economies boomed. That economies had tremendous manufacturing bases built to produce war material now converted to consumer goods seems lost on the economic historians touting the success of Keynesian activity during the Fifties and Sixties. As the economies slowed and the oil embargoes pushed the cost of production higher in the Seventies Keynesian policies began to unravel. No mind to Europe as social democrats continued their progress to where they are today, deep in debt, high percentage of their populations on government payrolls or entitlements and being forced to rapidly retract government spending and handouts.

The White House is under the economic policy advice of Keynesian philosophy. The modern neo-Keynesian philosophy is that for every dollar the government spends economic output will grow 1.5 times, a fifty percent return. Under this philosophy the "Stimulus Plan" in February 2009 of $787 Billion should have a return of almost $1.2 Trillion. Except there has been practically no return as most of the funds did not go into jobs stimulation in the private sector.

Underlying the Keynesian $1 of spending is that dollar has to come from somewhere, and that somewhere is the private sector. For the efficiency of government spending it needs to collect almost $2 for $1 it wishes to spend in transfer payments (social security, Medicare, government salaries). Further exacerbating the current situation is that most of the spending on "jobs" bills in Congress have nothing to do with enabling the private sector to create jobs, but rather end up increasing taxes on the private sector that inhibits job creation. Increasing payments to unemployed workers is not a "jobs" program, it pays people not to work. Making massive payments to state governments, $100 billion so far and requests for at least $25 billion more, to retain teachers is not a "jobs" program. Increasing taxes over $80 billion on small businesses is not a "jobs" program. All these measures continue or expand government payrolls, benefits and pensions that are being supported by a shrinking private sector.

Small and medium size businesses provide the overwhelming majority of jobs in the private sector. For the past few years credit has been almost non-existent to this sector restricting operating expenses, growth and expansion. Credit has been tight as banks are concerned about balance sheet audits and federal take-overs of banks considered "risky" by the Feds. Lending to small businesses can be risky. Too many small business loans by a local community bank results in a balance sheet that the Feds may not appreciate and require the bank to be absorbed by a larger regional or national bank. With the risk of losing a charter on the horizon smart bankers are sitting on their deposits.

Small and medium size businesses generally do not operate with the reserves or ability to gather capital like large businesses and multinational corporations. With the entitlement and benefit mandates included in Obamacare and other industry specific legislation passed many businesses do not have an idea of what their future costs will be. If I hire a new worker at $45,000 per year will it end up costing me $60,000 per year? Will the extended benefits I will have to provide to my current workers equal $45,000 so I should save the funds to insure against future employment costs? Uncertainty leads to stagnation. Few businesses expand into an uncertain economic environment. Faced with higher costs in benefits and taxes most businesses are not going to take on new employees until they know exactly what the cost-benefit analysis will be.

With many small and medium sized businesses family owned as either LLCs, Sole Proprietor or S Corporations profits and net income flow from the company income statement onto the personal tax returns. If the company profits $250,000 and the business owner decides to retain $150,000 in capital for reserves and cover operating costs, lines of credit or future equipment replacement, he is still taxed on the $250,000. A magic number with the Obama Administration to eliminate tax deductions for home interest deductions, increase marginal tax rates and expand taxes to health care premiums and other expenses. Facing increased costs on the business and personal side of the income stream business owners are not willing to invest in expansion or growth to further increase the net negative on their personal net incomes.

Throughout the current Congress every piece of legislation has expanded government and restricted private business. American Recovery and Reinvestment Act (Stimulus), Obamacare, Cap and Trade, Financial Reform, all programs near or over $1 Trillion have expanded government spending on government employees and increased the taxes, and therefore burdens, on the private sector.

Currently our federal debt is $13 Trillion and our national Gross Domestic Product is $14.4 Trillion. We owe 90% of what we produce. The debt is growing at a pace of $1 million every thirty seconds, the GDP is growing at a pace of $1 million every two minutes. Our debt is growing four times as fast as our production.

We need our elected representatives to stop pouring hundreds of billions of dollars into spending that does not directly produce private sector jobs. Failure to do this will create an economy that is an upside down pyramid with the balancing on the private sector becoming less and less secure. For examples of this look at the economies in Europe with huge public payrolls and entitlements balances on a shrinking private sector no longer able to support the taxes required for those payments.

Here's a "jobs" bill: expand the 2001 tax cuts across the board; reduce taxes by 10% on small and medium size businesses; suspend revenue collections under Obamacare for a minimum of twelve months; kill Cap and Trade; cap Federal payroll and benefits at 2% growth per year for the next five years.

Finally, quit thinking that the Federal Government can spend my money better than I can. Small business owners want to increase their company payrolls not the payrolls supported by their taxes.


DCS06072010

Why I Do What I Do

For those of you reading this who don't know what I do, I am a mortgage broker. I have been in the industry since 1988 and have a strong passion and commitment to my work. Every Friday I write and send to my past and current clients, real estate professionals and assorted others my "Weekly Rate and Market Update." It includes a Question of the Week that is generally sent to me to answer.

This week I used a question I am asked often from various areas, including within: Why do you stay in the industry? To answer the question I tell the story of a recent client. It perfectly summarizes why I do what I do.

Question of the week: Why do you stay in the industry?

Answer: This is a question I get from within the industry from time to time, and from within myself from time to time as well, checking in to see if I am still doing what I do for the right reasons. With all that has occurred in the last several years, and all the regulatory changes that are on-going, it certainly has been easy to question our participation and motivation. That said, I am a firm believer that everyone should ask this question of themselves regularly.

This week confirmed for me why I am in the mortgage business. While at times I enjoy what I do more than others, in the end helping a family achieve their dream of homeownership is the core of what I do. Along the way helping other families with financial management with refinancing is a big plus, but still secondary to the homeownership piece.

Every family’s home is special and I appreciate working with all my clients get the keys to their own front door. Some families however take a bit of a stronger hold on my heart as we pursue together their new home. These are the loans that strongly remind me why I am in this industry and will be in it for many, many years to come.

In April I was contacted by Eileen. She and her husband, Nick, wanted to purchase a condominium. They have a daughter with disabilities and wanted the permanence of their own home for themselves and for her as they raise her. There were challenges for us, we would be using a PERS loan, Eileen is a member of the Public Employees Retirement System which allows accessing retirement funds as a secured loan to use as down payment for purchasing a home. Because of the type of loan our lender partners were limited. As well we had less than 20% down so we would need private mortgage insurance, PMI, on a condo. Further complicating the issue was Nick teaches at night at a couple of different colleges so he can be with their daughter during the day.

One thing that came across very early was the commitment Eileen and Nick had to becoming homeowners. On meeting them and going through their qualification material I too became committed to their goal. Along with their agent, Jennifer, a team Eileen and Nick came together. Quickly they found the unit they wanted, unfortunately it was beyond their price range. But they were committed and this was the home they wanted.

Writing an offer below list price and at the edge of their price range, Eileen and Nick wrote a letter to the seller explaining why they wanted to purchase this property. Being honest about their situation and their desire for a home for their daughter had an impact and the sellers agreed to their offer.

Loan processes these past few years have become increasingly challenging with lenders tightening their standards and double crossing every “t” re-dotting every “i” and scrutinizing every comma. The primary reason is to ensure any loan they fund will be purchased by FHA, Fannie Mae or Freddie Mac. Knowing this and also the lender we would need to work with because Eileen and Nick were applying for a PERS loan, I warned everyone in the transaction, “By the time this transaction is completed we will probably go through the wringer. The lender will ask for additional paperwork, forms, etc that we do not even know about yet. There is a very good chance that at the end you will not want to do business with me again, and that is fine. I understand that and it is part of the business. But despite all this I will focus on one goal and that is the goal of Eileen and Nick to become homeowners. No matter what happens that is my goal.”

Thankfully, very thankfully, everyone in the transaction understood and were committed to the same goal. The professionals in the transaction acted as professionals (thank you Jennifer, Carol and Carmen among others) and when a snag popped up did not lose their heads calling and screaming at everyone.

It could have been one of those deals to get the label “Nightmare.” But instead it became one labeled “Career Validation.” No matter what was needed, instead of asking “why do they need that…” and trying to argue the request from the underwriter, the document or form was provided by whoever needed to provide it. No matter what the delay, instead of yelling and screaming about docs not being sent from PERS, or underwriting not signing off on a condition yet, the response was, “okay, let us know when you hear something.”

Everyone was on Team Eileen and Nick. Everyone wanted them to have this home for themselves and their daughter. Everyone worked together and kept working together to the finish.

Yesterday after more running around and collecting documentation asked for by the underwriter an hour before the funding deadline we finally provided everything we thought could be provided. As the 12:30 deadline approached I sat at my laptop staring at the clock in the corner.

At 12:31 I received an email and picked up the phone. “Eileen, we funded. You are going to be a homeowner.” Gratitude. Tears. On both ends of the phone.

Thank you Eileen and Nick for allowing me the opportunity to help you with your goal of homeownership. Thank you for showing me why I am in the mortgage business and what it is I get to do every day.

Our industry gets kicked around a lot. There are plenty of people who do damage to the industry with their rotten behavior and looking to make what they can on who they can. But for most of us in the mortgage business we are in it because of Eileen and Nick. And Curtis and Lisa. And Donna. Or Lee. Or Steve and John. We are in the business to enable and protect homeownership and allow families to fulfill their goals and objectives.

Thank you for allowing me this indulgence this week to tell why this business is so important and why most of us still in it remain. And a special thanks to all those who support my business and have used me for their mortgage needs throughout the twenty plus years I’ve been taking loan apps and making the phone call, “we funded.”
Have a question for me? Ask me!

DCS06042010

Budgets

It is that time of year again when elected officials in Sacramento realize their deadline to have a budget in place is rapidly approaching and they need to quit spending time proposing laws that require citizens to use light bulbs filled with hazardous materials, ban parking in cities, and close businesses and move jobs across state borders. We are in the time period when Sacramento must figure out how to pay for the excessive spending habits they have not reined in through previous budgets, or if they will continue their habits and find other ways to fill the approximately $20 - 25 billion deficit.

You may recall that last year a similar gap was filled mainly with new taxes and more borrowing by the state. A budget was finally passed when a few Republicans in the Assembly and in the Senate left party ranks and joined the Democrats in voting "aye" and then Governor Schwarzenegger backing down off his rhetoric about no new taxes and signing the bill. Of the Republicans that crossed the aisle to raise taxes a few of them are termed out and now running for statewide office, those facing re-election are facing voters with long memories of their budget votes.

For this year's budget dance the Governor has proposed his budget, without any tax increases, and immediately it was picked apart by the major media in the state (read: Los Angeles Times, San Francisco Chronicle) and the Democrats as being "unfairly balanced" on the poor. Not facing the reality of the fact that a budget where the bulk of the spending goes to either public employee salaries or services to the "poor." I say "poor" because it seems the definition of "poor" for purposes of receiving free services from the state keeps moving up the income ladder. Further, like many states but more than most, our illegal immigrant population enjoys the ability to partake of most of these benefits and services.

Having expanded the scope of medical, education, housing and nutrition services throughout the state while decreasing the opportunities for private businesses to open and expand, Sacramento has created a balance sheet that is light on services for taxpayers and employers and heavy on services for those defined a "in need" by state bureaucrats and politicians. Now that it is time to close a $20 billion gap between revenues from fees and taxes and spending the Governor has realized that the revenue side of the budget is tapped out. Any more taxes in an economy with unemployment close to 15% in the state and unemployment plus under-employment exceeding 20% will greatly reduce future revenue through reduced tax collection due to increased job loss, corporate relocations and drop in consumer spending. Schwarzenegger realizes spending must be cut.

Naturally in criticizing Schwarzenegger's budget individual programs are chosen and picked to show the inhumanity of his budget cutting $10 million from a program that helps the elderly exercise or $25 million from a program that provides free dental cleanings to children in-need. With every story about the budget we receive the individual human interest story of someone impacted by the cruelty of the Governor's budget. Inevitably there is no suggestion as to what should be cut to close the $20 billion budget. Note that not reported are the individual stories of the worker laid off because his company has higher tax and regulatory obligations.

On the Democrats side Assembly Speaker John Perez has proposed a budget that does not cut spending, increases taxes on oil production, extends the "temporary" tax increases passed in earlier budgets, postpones a corporate tax credit for expanding businesses and job creation and borrows $9 billion. Yes, borrows $9 billion to fill the budget deficit.

So as we eagerly await the June 30th deadline to pass a budget that will undoubtedly be missed yet again, we can assess the California economic landscape in which the budget debates will occur. Rising unemployment is reducing payroll tax revenue. Increases in business failures and closings are reducing corporate income tax revenue. Increased "wealth flight" is decrease personal tax revenue on interest, dividends and capital gains. Increased unemployment is reducing consumer spending reducing sales tax revenues. Continued foreclosures on residential housing continues property value declines in some areas while other areas have struggled back to flat values, decreasing property tax revenues. An increasing rise in commercial foreclosures will see a result of decreasing commercial property values, decreasing property tax revenues.

The economic engines that generate tax revenues are in decline in the state. One of the factors in our last several budget deficits has been an over-estimate of tax revenue collection. Raising more taxes in this environment will create a bigger budget deficit merely due to another under-estimate of tax revenue due to a budget increasing taxes, again.

California is Greece. Greece's economy crashed and it took an emergency bailout from other nations to save the country. But the bailout came with strings. Greece had to change its social democratic priorities and cut spending, cut entitlements and put the economy on a foundation of a private sector generating jobs not taxes for government salaries and benefits. Government programs and entitlements that created a budget that was incredibly upside down and balanced on private jobs and companies for the benefit of public sector jobs and entitlement recipients finally tipped over.

California's budget has become similarly upside and balanced on the on the private sector. Unless the majority in Sacramento understand the economics of our state economy and public spending the budget will tip further towards complete default in the near future.

Sacramento must balance a budget based not on more taxes and expected tax revenue, and especially not on more borrowing, but rather on systematic and institutional cuts to spending and allocation of resources. We have seen through the relative lack of loss in service due to furloughs that we can cut significant amounts from departments across the state with little productivity loss. Spending must be cut, any failure to do so will plunge the state into default and economic chaos in the very near future.

Who knows, maybe the plan is to run the state over the brink forcing Washington to come save the state with a huge bail-out of its own. Being the 7th biggest economy in the world how can Washington allow it to fail? Does "too big to fail" apply to states? Maybe that is the safety net for Speaker Perez and the majority as they start to move ahead with with their plan to spend, tax and borrow out of the budget deficit.

Thankfully our State Constitution requires a two-thirds majority requirement to pass a budget. I am hoping this year every member of the minority holds firm to not passing any budget that will increase taxes and borrowing to achieve a balance, but I'm sure there will be enough defections at some point in the process to push California closer to complete default.

Remember votes counts, they have led us to where we are now. Will yours help us change direction in the future?


DCS06022010