Federal Reserve Bank Confirms It - Negative Amortization or Principle & Interest, which way is the best?

For years I have been advising my clients to stop giving their money to the bank and give it to themselves instead. This is the fundamental principle of The Bank of You Paradigm, that is, "Give yourself the money you would have otherwise have given to the bank, so that YOU can make the profits from YOUR MONEY that the bank would have otherwise made."

We generally accomplish this by separating equity from real estate, combined with a mortgage that allows you to make payments that continues this process via "Negative Amortization". With Negative Amortization you systematically separate a small amount of additional equity from your real estate each month because the bank (your lender) will allow you to make a payment that is less than the interest accrued. That "unpaid interest" continues to reduce the equity in your real estate and now the money you would have given to the bank can be given to YOU to accumulate and grow! Truly, the only "negative" about this strategy and this type of loan is the lack of understanding most people maintain concerning the strategy and the slew of bad press concerning the loan.

I know it sounds crazy, but over time this system will allow you to accumulate cash in your Bank of You account and ultimately, allow you to payoff your mortgage off sooner than you would have had you sent the money to the bank.

Now, the Federal Reserve has validated this process! In fact, The Federal Reserve Bank of Chicago has released a study that states that 38% of American households are, "making the wrong choice." Because most homeowners fail to implement this process, "these mis-allocated savings are costing U.S. households as much as $1.5 billion dollars each year". Furthermore, by implementing The Bank of You strategy consumers would improve their returns by an average of 11-17%. That is huge!

If you have ever been concerned that you had made the right choice, a "Better, Smarter, Safer" choice to follow The Bank of You Paradigm process, then I belive that this report should quell those concerns once and for all. The Federal Reserve has no product or service to sell, no hidden agenda to support. They are an un-biased 3rd party that, with a professional research team, came to the same conclusion as I had. That is, "Don't do what banks want. Do what banks do."

You will find the report from the Federal Reserved here http://www.chicagofed.org/publications/workingpapers/wp2006_05.pdf. I will warn you, however, it is a research paper and the reading is very dry. For most people, reading the one-page "Abstract" will be sufficient. That said, if you want the numbers to support your position, now you have them.

Market update for September 28th, 2007

Core Consumer inflation appears to be under control and within the Fed's target range, as the Core PCE for August was reported at 0.1%. The number matched expectations and left the more closely watched year over year Core rate at 1.8%, down from the previous 1.9%. The Fed's target zone is 1 to 2%, so this is welcome news for the bond market. It also could give the Fed a green light to cut rates further.

In re-capping yesterday’s action, Mortgage Bond prices registered a nice 25bp gain and jumped back above the 200-day Moving Average, following a strong showing in US Treasury’s $13 Billion auction of Five-year Notes. Foreign appetite for our Bonds remains strong.

This morning, the Personal Income and Spending report showed consumers are still whipping out their credit cards. Consumers showed they are resilient with a 0.6% increase in spending, the highest monthly growth rate in three years. Incentives by auto manufacturers sent consumers flocking into car dealer show rooms as spending on autos and other durable goods led the way with a 2.8% increase - the largest increase in two years. Meanwhile, Personal Income grew by 0.3% during the month, which was lower than expectations and the slowest monthly growth rate since last April.

The Chicago Purchase Managers Index (PMI) for September was reported at 55.0, which was stronger than expectations of 53. The University of Michigan ’s Revised Consumer Sentiment Index for September was reported at 83.4, which was essentially in line with expectations. Bond prices held their position on these releases.

The bond market will be on the lookout for any stray remarks that could move the financial markets from today’s line-up of speeches from four Federal Reserve officials. Speeches are scheduled for Atlanta Fed President Dennis "The Spider" Lockhart at 10:00am ET; San Francisco Fed President Janet Yellen at 10:15am ET; St. Louis Fed President William "everyone into the" Poole at 1:00pm ET; and probably the most highly regarded Fed Governor, Frederic Mishkin will speak at 1:15 pm ET.

Bonds are showing some life after breaking above the 200-day Moving Average. But before we float blindly and start partying, the Bond does have some close overhead resistance at the Falling Window just 6bp higher at the $100.44 level. For now we will float, but be mindful that the overhead resistance nearby could push prices back lower.