The housing market is in a slump! Not just here, but everywhere, regardless of where “here” is. This slump is the natural outcome of an over-heated housing market earlier this decade. The “irrational exuberance” of real estate buying, whether for speculation or ownership, was similar to the tech crazed buying of the 1990s stock markets ... and we all know what that led to. We now know this last real estate boom and subsequent meltdown was fueled by the sub prime “liar loans” offered during the last decade.

If you were caught speculating on residential real estate and invested towards the end of the cycle, you had your hat handed to you! According to Robert Shiller at Yale University, “It is not improbable that we will see large real price declines [of residential real estate] extending over many years in major cities that have seen large increases ... In the last cycle in the U.S., real home prices fell only 15% from the peak in 1989 to 1996, but some cities real prices fell much more. Los Angeles fell 42% from 1989 to 1997. London fell 47% from 1988 to 1995.” Based on history, we may have just begun to see the slaughter!

Since 1995 the number of families renting actually declined as renters bought homes, even as the population was increasing. During this same period, home ownership increased about 35%. In 1995 about 28 million Americans owned homes. As of 2005 about 38 million Americans owned a home which represents an increase from 64% to 69% of the population. This is exactly the same time period the mortgage industry introduced the “sub prime liar loans” or loans that did not require verification of income, tax returns or ability to repay loans. In essence, just about everybody qualified to purchase a home!

 

 

Although it's a chapter we never want to come to in our lives, many of us have at least shared in the experience of a divorce. When the marriage is over, there's still the rest of your life ahead. Knowing the facts about arriving at a fair divorce settlement is crucial to address current and long-term financial needs to ensure a better tomorrow. When should you involve a Certified Divorce Financial Analyst ("CDFA," previously CDP, Certified Divorce Planner) when considering a divorce? After making financial comparisons of each settlement offer and the effects to both parties, "every time" appears to be the most logical answer.

A CDFA has a primary objective - to achieve a financially fair and equitable distribution in the divorce settlement for the client. An attorney defines "equitable" as the legal allocation of assets. In Arizona, as a community property state, an equitable distribution is usually a 50% split of marital assets. A CDFA looks closely at those assets and determines who will benefit most from each asset, from a "needs based" perspective. Attorneys come from a "source based" perspective, wherein if there is $1,000,000 in assets, each spouse will receive $500,000 each. So, if there's $500,000 equity in the house and the wife is emotionally attached to the house, the attorney might allocate that to her. And if the husband has a $500,000 pension, the attorney might allocate that to him. The problem in this case is, the husband has maintained financial security and the wife has a house that eats mortgage payments that she may only be able to maintain as long as the alimony is paid.

A CDFA is able to create case exhibits and provide expert reliable witness testimony if the case were to go to court, to illustrate both party's net worth and liquidity (ability to pay bills) both now and into the future. For example, while a pension will continue to increase in value, the net worth of the spouse who was allocated the house may be reduced if the recipient is unable to afford the mortgage payments after the alimony has stopped, forcing possible foreclosure if unable to sell the house efficiently. Additionally, the house which was an asset the spouse may have been emotionally attached to, may have to be surrendered for something of lesser value. A liquidity analysis by a CDFA would have identified the cash flow inability of the spouse receiving the house. In this case, a better option may be to provide more community assets to the higher wage earner and in return he/she would provide more alimony to the spouse so that more cash flow could be used to maintain the home. The spouse receiving the house may have to refinance the home to offer some equity to the higher wage earner in exchange for more alimony. By making these projections, a CDFA will be able to illustrate the net worth and liquidity "situation" of both spouses under negotiation to provide the most equitable settlement.

Alimony, also known as spousal support, is usually paid to the spouse who earns a lesser income. Alimony is based upon general formulas set by the state of Arizona. It is deductible to the payer and taxable to the payee. If not planned properly, this can be another financial black hole if the spouse receiving the alimony is not prepared for the year-end tax payment due to Uncle Sam. Of course, the higher wage earner may benefit, from a tax standpoint, by receiving more assets and increasing tax deductible alimony he/she pays.

Another projection taken into consideration when planning for a secure financial future is the fact that child support is paid to the custodial parent only as long as the children are minors (under 18) and living with him/her. Once the children mature and leave the house, will the spouse be able to live on the reduced income? And if not, have other arrangements and investments been made to ensure that this lifestyle may be maintained with the reduced income? Is this the point where the home-owning spouse needs to sell the house? The CDFA's financial projections can determine this before the divorce is settled, letting both parties know the effect of each settlement offer.

A CDFA understands that once the divorce legal document is signed and assets are distributed, there is usually no renegotiating of the settlement, with the exception of child support which may be changed after the divorce. Therefore all assets and allocation settlement options should be brought to the table before this takes place to ensure the best decisions are made.

When working with an attorney, a CDFA's goal is to give their client a clear understanding of all the financial issues, such as (1) alimony and child support, (2) personal vs. marital property, (3) valuing and dividing property, (4) retirement and pension values, (5) how to split the house, and (6) tax problems and solutions. And by giving the client the opportunity to analyze the effect of each asset allocation settlement option, in both its present and future financial effect, there is a more secure and satisfied confidence in making the final decisions. Many attorneys are advising their clients to work with a Certified Divorce Financial Analyst to ensure their clients will be satisfied with the outcome now and also in the long run. Satisfied clients boost the attorney's reputation and encourage referrals. It's a win-win situation for everyone involved.

This additional support and advice of the CDFA to the client provides an objective viewpoint in what can sometimes otherwise be an emotional and mentally-charged situation. The client will have peace of mind that the settlement they are choosing is financially feasible and their future will be secure.

Many experts are now recommending CDFA's and financial planning, including Fortune Magazine, writing April 15, 2002, "The latest must have divorce accessory... specially trained Certified Divorce Planners." The Wall Street Journal, February 12, 2003 issue, wrote an article titled, "How to Plan the Perfect Divorce: Hire a Specialist." Within this article, Rachel Emma Silverman writes, "...divorce planners have been a big help and money saver in the long run." July 30, 2003, in the Wall Street Journal's article, "Don't Make a Bad Split Worse: Plan a Financially Sound Divorce," Terry Cullen writes, "Even the most amicable split-ups can lead to financial disaster without careful planning." CDFA's offer invaluable information on the forefront of divorce settlement so that a financially fair, equitable and just resolution can be achieved, not only for the moment but also down the road.

A CDFA has graduated from the Institute for Divorce Financial Analysts (previously the "Institute for Certified Divorce Planners"), has received special training in the financial issues of divorce, and has fulfilled continuing education requirements to meet the goal of providing sound financial advice in this area. The Institute for Certified Divorce Planners was founded in 1993. It was developed to fill a need for financial expertise in the area of divorces.