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- Mortgage fraud at an all-time high

Mortgage fraud at an all-time high
As the number of home sales dwindles and lenders tighten requirements for dolling out loans, desperation breeds dishonesty.
By Catherine Clifford, CNNMoney.com staff writer
Thursday March 19th 2009

The number of reported incidents of mortgage fraud has reached an all-time high even as the number of home loans being issued has shrunk, according to a report released Monday.

Cases of reported fraud surged 26% from 2007 to 2008, according to the Mortgage Asset Research Institute (MARI), a LexisNexis Service, which compiled the report for the Mortgage Banker's Association.

"With fewer loan originations today, the data suggests that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud," Denise James, LexisNexis Risk and Information Analytics Group director of Residential Mortgage Solutions, said in a written statement.

Another factor in the rise in reported fraud cases is deeper scrutiny of borrower details. "We have cited in the report that some of the increase in our incident report is a result of lenders doing more due diligence up front," James in a conference call.

But sometimes fraud goes unnoticed because of the complexity of the mortgage application process. "Fraud enjoys confusion," John Courson, president and chief executive of the MBA, said in the conference call. Therefore, his organization advocates a simplification of the mortgage transaction process.

State by state: Rhode Island had more cases of mortgage fraud than any other state, according to the report. Through the first quarter of 2009, Rhode Island recorded three times the rate of fraud that would be expected based on the number of mortgages originated in the state. This is the first time Rhode Island officially has made the top 10 list. It was retroactively boosted to the fifth place in 2007.

Florida recorded the second highest percentage of mortgage fraud compared with expectation, after leading the pack for 2007 and 2006. Illinois came in third, followed by Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.

Types of fraud: "MARI data shows that mortgage fraud is more prevalent today than it was at the height of the boom in mortgage loan originations," Courson said in a written statement.

Mortgage fraud serves two purposes, James noted on the conference call: making a quick buck or getting a home.

"Fraud for profit" is a scheme concocted to collect cash, with no interest in owning. In "fraud for housing," homebuyers fake documents that make them appear eligible so they can get a home or upgrade to a bigger one.

The most prevalent form of mortgage dishonesty in 2008 was application fraud. According to the report, 61% of all reported frauds in 2008 were a result of misrepresentation on the application for a mortgage. This is the fifth time application fraud has topped the list.

The second most prevalent type of fraud was due to misleading tax returns and financial statements, which represented 28% of fraud in 2008, up from 17% in 2007.

The third most frequent type of mortgage fraud involved overestimating the appraisal or valuation of the property. Other types of mortgage fraud included manipulation of the documents related to verification of deposit, verification of employment, escrow and closing documents and credit reports.

New fraud varieties: "Not only are we seeing traditional fraud trends, such as application fraud, but we are also seeing new types of emerging fraud occur," said James.

With a record number of homeowners entering foreclosure, foreclosure-prevention schemes will likely be a popular way of deceiving struggling home owners. A huckster, claiming to help the drowning homeowner, convinces the homeowner to give over the legal rights, or deed. Then, the scam artist rents the property back to the homeowner while simultaneously selling the property.

The report also cites elderly and immigrant identity fraud as a likely emerging trend. Lastly, the report predicts builder fraud will increase in popularity, where someone obtains investor cash for a project and then takes off with the money before the development is completed.
 

- Mortgage applications spike

Mortgage applications spike
Refinancings soar as home loan rates fall after the government's actions to stabilize housing.

U.S. mortgage applications surged in the latest week, driven by a spike in demand for refinancing as the average rate on 30-year fixed-rate home loans fell, the Mortgage Bankers Association said on Wednesday.

Refinancing applications jumped 30% in the week ended March 13 as the borrowing rate dipped 0.07 percentage point to 4.89%, tying the record low reached in early January in a survey that dates to 1990.

BUYERS BEWARE! more and more homes are coming off the market due to refinancing and mortgage restructuring. What this means for you. The norm; less homes equals higher prices, however not this time around. What you'll find are homeowners standing thier ground for thier "fair" asking price. So, is now the time to buy? you bet

The MBA's market index, which includes both purchase and refinance loans, jumped 21.2% to 876.9, the highest since mid-January
But purchase applications rose just 1.5% last week to 257.1, a one-month high.

The Mortgage Bankers Association said its seasonally adjusted refinancing applications index jumped 29.6% in the week ended March 13 to 4,497.6, also the highest level since mid-January.

Home loan rates have fallen as the government has purchased more than $250 billion of mortgage-related assets and announced unprecedented steps to stabilize the deepest housing slump since the Great Depression.

A year ago, the average rate on a 30-year mortgage was closer to 6%.

The Federal Reserve purchases of mortgage-related assets is nearing the half-way mark targeted by the end of June to help cut mortgage costs and revive housing. The programs are widely expected to be expanded to bring borrowing costs down, stimulate purchases and help struggling homeowners to refinance and avert foreclosure.

Refinancing requests represented about 73% of all mortgage applications last week.
 

- Why to Buy a Home Now

Why to Buy a Home Now
March 01/2009

If you're renting and wondering if you should buy a home, consider what bestselling author, David Bach, says, "The average homeowner is worth 35 times more than the average renter."

 He advises renters to take action immediately and start saving part of their paycheck every month to help accumulate a down payment. He also encourages renters to borrow 10-20 percent less than what the bank is willing to lend; that way they're only buying as much home as they can afford.

The longer you rent, the longer it may take you to eventually get into homeownership. If the market conditions have scared you, perhaps you're not looking at the other side of the coin. Owning a home becomes part of your investment portfolio, provides tax benefits, allows you to build equity (it still exists), and, if you buy now, you may get an excellent deal.

According to a MarketWatch news article, buying a home now can provide some real negotiating power to request improvements, price reductions, help with closing costs, and more. "People can get a lot of what they need and almost all of what they want today," said Jay Papasan, one of the authors of "Your First Home".

While poor market conditions have created a troubling situation for some homeowners, the downturn has made the buying market ripe for others. The affordability of homes is better than ever. The National Association of Realtors' housing affordability index concluded that homes in December of 2008 were more affordable than at any other point since 1970 (the start of the index). And with numerous foreclosures on the market and prices dropping in many areas, now is a good time to buy. But in order to make your purchase profitable, here are some things you should consider.

How long will you be in the home? Some experts advise that if you are planning to move within a year, buying may not be the best option because of the expenses associated with moving. However, if you're searching for a place to live for, at least, several years, buying now could be a good choice for you.

How much you can afford. Don't let tighter lending regulations scare you off from making a purchase. Instead, understand what you truly can afford. Don't get caught up in buying too much home. In fact, these days, the trend is moving toward smaller homes -- simpler living.

Mortgage rates drop to historical low. How much home you can afford is affected by mortgage interest rates that, right now, are highly appealing. Good credit, documenting your income, and a substantial down payment will make you a better candidate for the better mortgage rates.

Freedom to choose. Now, unlike several years ago, the market has a large inventory in many areas. The market time to sell a home has increased which creates a large inventory of homes, everything including new, existing, and foreclosures. Buyers can peruse the market and have the freedom to select the home they really want. If you're interest is in a new home, know that many developers are getting more competitive with their pricing because they also have taken a hit by the ailing economy.

Quality of life. Buying a home can create a higher quality of life, giving you pride of homeownership, and something to enjoy improving and developing over the years.

Tax credit benefit. Last summer, the federal government started providing up to a $8,000 tax credit to buyers who have not owned a home in at least three years; the tax credit NO LONGER HAS TO BE PAID BACK. The National Home Builders Association and National Association of Realtors are pushing for more significant help for all home buyers -- not just those who are buying for the first time. The Senate, as part of a stimulus package, this month approved a temporary new tax credit to be applied to homebuyers' tax bills. The credit would give buyers 10 percent of the purchase price of any home, up to $15,000. Alan Zibel of the Associated Press writes, "Anyone who buys a home within a year of the bill's signature would qualify. To deter speculators, buyers must occupy the house as their main residence for at least two years." At the time of this writing, the stimulus package had not yet gone to the White House.

- Smaller Budgets, Smaller Houses

Smaller Budgets, Smaller Houses
Builders Scale Back As Buyers Look For Long-Term Savings
By ELIZABETH RAZZI | Special to The Washington Post
March 01, 2009
Frugality is finally showing up in new home developments.

Although the number of new single-family houses sold nationwide this year will probably be down about 68 percent from the peak of almost 1.3 million sold in 2005, there will still be about 420,000 households buying new homes this year, according to the National Association of Home Builders.

But recession-chastened house hunters are looking for different things than the boom-era buyers who snapped up homes that grew bigger, fancier and pricier by the month.

Because they aren't held back by the need to sell an old home, first-time buyers now make up a greater share of the market. They're trying to stretch their dollars at every turn, and many are concerned about the cost of heating and cooling, especially after having experienced the surge in fuel costs last summer.

Builders say buyers are judging a home in terms of how comfortable it will be as a living space for the long term, rather than as an investment they can flip for a profit after a couple of years.

"People are realizing that to control the cost, especially of new construction, that they are opting for less square footage," said Greg Ugalde, president of T&M Building Co., based in Torrington. "People are much more conservative now in their selections, of both the style and the options they are putting into their homes."

Ugalde said the company is once again offering new homes as small as 1,800 square feet in each of its five current developments under construction, a size that failed to grab much attention a few years ago.

'A Starting Point'

"We are giving people a starting point that may fit more into their budget," he said. "And I think the trend coming this spring is that people are going to opt back to some unfinished space. You can get rooms over the garage and unfinished basements, and add to that later when it fits into your budget."

Such consumer choices are just starting to appear in statistics.

In the July-September quarter of 2008, the average size of a house under construction fell 7.3 percent, to 2,438 square feet from 2,629 square feet in the previous quarter, said Gopal Ahluwalia, vice president for research at NAHB. "This is the first time we have seen such a significant decline," he said.

It may be only one quarter's worth of data, but Ahluwalia has other reasons to think the drop may be more than a fluke. He surveyed builders in early January, and 90 percent reported that they were building smaller homes. Eighty-nine percent said they were building lower-priced homes.

Until recently, builders have focused mostly on grand houses larded with upgraded countertops, flooring, cabinets and bath fixtures.

Heading into the spring, which is usually peak season for home sales, many builders are calling attention to the ways their homes save money and energy. Smaller size is one way they're trimming the cost.

For example, Atlanta-based Beazer Homes recently started to shrink its designs. Diana Van Stone, vice president of sales and marketing, said their high-end houses, which used to be about 3,600 to 3,700 square feet, now average about 3,000 square feet. "On the higher end, we've whittled away at that quite a bit," she said.

In Connecticut, permits for new home construction plunged 25 percent in 2008, marking the fourth straight year of declines. There were 4,910 housing permits issued in 2008 in the 128 towns that the state monitors monthly. That compares with 6,619 permits in 2007, according to the state Department of Economic and Community Development report. The permits are issued for all new residential construction.

Energy Conservation

Van Stone said Beazer is also paying more attention to energy-conserving and environmentally friendly features such as efficient appliances, programmable thermostats, compact fluorescent lights and paints that emit less toxic fumes, all of which are now standard features.

"Our homes are offering what we feel the public is moving toward," she said. "I think people's priorities have changed. Now it's not only about living in the home with my family, but whether I can afford it in the long run — being able to truly afford it."

Brookfield Homes, based in Fairfax, Va., may be taking the smaller-and-greener trend the furthest. The company recently set up an "energy lab" in one of its model homes in the Snowden Bridge development near Winchester, Va.

The house has a small wind turbine and solar photovoltaic panels on the roof, both of which generate electricity. There also are solar collection tubes on the roof to heat the home's water supply, and a geothermal heat pump to provide heat and air conditioning.

The features are already available as options on Brookfield's models, and the company will be collecting information this year on how the technologies perform compared with traditional sources of energy.

The energy lab is on display in one of the smallest detached houses available in the builder's Village series of detached houses, which range from 1,250 square feet to more than 1,600 square feet — basically the size of many townhouses. Optional garages and extra rooms can be added.

These smaller houses accounted for about 65 percent of sales over the past six months, sales manager David Poole said.

"It's an easy buy to get into that house just because of the circumstances of the economy," he said. "People aren't buying big, huge homes with no yard."

The smaller homes also happen to be more efficient — and less expensive — to build. That's no small matter for builders struggling through the worst market of their lifetimes.

If you were to add all the renewable-energy technologies to the Snowden Bridge test house, it would boost the price by about $25,000. A la carte, they cost more.

The geothermal heating/cooling unit is most expensive, at $12,000. The technology takes advantage of the consistent 55-degree temperature that the earth maintains just a few feet below the surface, all year, to heat the air in winter and cool it in summer. The only machinery visible is what looks like a traditional forced-air furnace in the basement. There's no need for a noisy air-conditioning or heat pump unit that drowns out conversation in the back yard.

Three electricity-generating photovoltaic panels mounted on the roof cost $10,000.

A package of liquid-filled tubes on the roof — it somewhat resembles a car radiator — collects solar heat that is then transferred to the hot water tank. That unit costs $7,000.

The roof-mounted wind turbine to generate electricity is no more obtrusive than a large weathervane. It costs $2,500.

Buyers can qualify for federal tax credits of up to $2,000 for each of the geothermal and solar hot water systems. The tax credit for the photovoltaic panels can cover 30 percent of the cost, and the wind turbine may qualify for a tax credit covering 30 percent of the cost. Poole said the company estimates that a home using all four technologies would cut energy costs by about 70 percent.

The homes may be the size of an entry-level townhouse, but with windows on all four sides and the option of having a main-level attached garage behind the house, they have the convenience and feel of larger houses.
 

- Is A Mortgage Modification For You?

Is A Mortgage Modification For You?
March 01/2009
Home loan modifications are designed to save homeownership, but they've also created a new mortgage maze pitted with "buyer bewares."

 Both government-sanctioned counseling agencies and local community service agencies concede they have been swamped recently by demand for loan modifications.

The demand stems from a proliferation of federal, state and local level foreclosure relief and bailout efforts from both government and the private lending industry.

Mortgage modifications have been around for years, but those recent relief efforts have raised the profile of the mortgage workouts as an alternative to foreclosures, short sales, auctions, and bankruptcy.

The demand has opened the floodgates of loan modification services now offered by real estate agents, mortgage brokers, attorneys, government agencies, lenders, and other professionals.

No matter where they start, homeowners seeking mortgage modifications are at the mercy of lenders. The workouts are often voluntary and, completed on a case-by-case basis, they frequently come without standardized procedures.

Caught in the lurch, homeowners are finding it tough to know when a modification will work and how to best obtain one. This story and a follow-up next week will shed some light on the subject.

What is a mortgage modification?

A home loan modification, granted only upon the existing lender's approval, permanently reworks some of the terms of an existing mortgage in order to make the loan more affordable to the homeowner.

The strategy is typically designed for homeowners struggling to pay their mortgage, not for those who can pay their mortgage or are eligible for a refinanced loan.

Modifications are generally lender fee-free and involve the lender or loan holder lowering the interest rate and or changing an adjustable-rate mortgage (ARM) to a fixed rate mortgage (FRM) with a 30-year term. Some form of mandated homeownership counseling generally comes with the deal.

Less common loan modifications include adding missed payments to the loan balance and extending the term of the loan. Least common is getting the lender to reduce the principal or wipe out any second mortgages.

A mortgage modification is not a refinanced mortgage -- a brand new loan written to pay off the old home loan.

"A mortgage is one of the most complex transactions there is. A loan modification is also a gray area for a lot of people. So of course people need someone to walk them through the process to tell them this is what you need and this is what you don't need," said Ginna Green, spokeswoman for the California office of the Center for Responsible Lending in Oakland.

Is a loan modification for you?

Greg Pennington, a San Francisco-based mortgage banking consultant and counselor with Parker-Pennington Enterprises, says a loan modification isn't for everyone.

A loan modification may not be viable if:

The modified loan comes with payments you still can't afford.

Your current interest rate is already low and there's no room for the lender to lower it further.

You can make the new payments, but the mortgage balance is greater than the value of your home and you don't plan on staying put long enough to reverse the loan-to-value imbalance.

You have not already missed payments on your mortgage or can't show financial hardship due, say, to job loss, pay decrease, illness or interest rate increase.

You have other properties, investments or assets that could be liquidated to cover your mortgage debt.

A short sale (The lender forgives a portion of the debt owed if you can find a buyer), bankruptcy, auction sale, refinance or other approach, short of a foreclosure, is a better option.
"You can do a loan modification and not be aware of where you stand. You can get a loan modification for a home you don't want to be in," said Pennington.

A financial, housing or credit counselor can help you determine your best option. Just be prepared to hold down the fort for the 60 to 90 days or more it could take to complete the modification, due to potential complications and document processing times.

- Housing starts unexpectedly surge

Housing starts unexpectedly surge

Government report shows construction of new homes jumped 22% in February.
By Ben Rooney, CNNMoney.com staff writer
Thursday March 19, 2009

Initial construction of U.S. homes unexpectedly surged in February, after falling for eight months, according to a government report released Tuesday.

Housing starts rose to a seasonally adjusted annual rate of 583,000 last month, up 22% from a revised 477,000 in January, according to the Commerce Department. It was the first time housing starts increased since June, when they rose 11%.

Economists were expecting housing starts to decline to 450,000, according to consensus estimates compiled by Briefing.com. Still, starts are down more than 47% from February 2008, when over 1.1 million new homes broke ground.

New construction of single-family homes, considered the core of the housing market, increased 1.1% to an annual rate of 357,000 versus 353,000 in January.

February's increase was driven by a nearly 80% increase in construction of multi-family homes. New construction of buildings with 5 or more units increased surged 80% to 212,000 from 118,000 in January.

Applications for building permits, considered a reliable sign of future construction activity, rose 3% to a seasonally adjusted annual rate of 547,000 last month. Economists were expecting permits to fall to 500,000.

While the surge in new construction was a welcome sign for the nation's battered housing market, analysts warned that the increase could be short lived.

"With new home sales still falling and the months' supply at a record, there is no reason for homebuilding to rise," wrote Ian Sheperdson, chief U.S. economist at High Frequency Economics in a research note. "This is a temporary rebound, not a recovery."

New home construction surged in the Northeast, jumping nearly 89% last month. Starts also increased in the Midwest and the South.

In the West, where the housing market was overbuilt in the boom years and where there is a glut of foreclosed homes, starts declined nearly 25% versus the previous month
 

- Buy Now! Beat The Spring Rush

Buy Now! Beat The Spring Rush
March 01/2009
Down market. Up market. It doesn't matter. Spring showers typically bring spring buyers.

 But if you wait for the seasonal thaw you'll join what could be a throng of market savvy buyers who have already scoped the lay of the land and are elbowing for position.

In many communities, an over-supply of homes for sale with reduced prices, foreclosures, auction sales and sellers shopping for short sale buyers, all make it an opportune time not to procrastinate.

"We are seeing a confluence of events that contributes to the increase in the number of closed sales," said Quincy Virgilio, president of the Santa Clara County Association of Realtors in San Jose, CA.

"Interest rates are at a record low and the affordability index nears a 5-year high. For first-time buyers, rents are skyrocketing and that's an added incentive to buy a home now," added Virgilio, also broker-owner of Realty World California Property Network, also in San Jose.

That doesn't mean every home is a Blue Light Special or that you can shop with reckless abandon. It's a better idea to prepare now, become a savvy buyer and beat the spring rush.

To help get you started we've gleaned some key tips from "Buying Your First Home Now" (Nolo.com, $24.99), by Ilona Bray, Alayna Schroeder, Marcia Stewart and a dozen contributing experts knowledgeable in everything from credit, borrowing and buying to escrow, insurance and taxes.

• Check your home-buying pulse. Just because there's a convergence of favorable market conditions doesn't mean it's your time to buy.

Base your decision solely on the state of your housing market and you'll overlook why the current market is littered with the former homes of those who borrowed more than they could afford.

Likewise, if you wait for prices to fall more your could miss out. No one knows when the market will hit bottom until it begins a sustained upward turn and you can look back and actually see bottom.

Buy a home because, for you, it's the right thing to do. Buy because it's more affordable than renting, because you plan on staying put until it pays off, buy because it is a good fit for your lifestyle and your personal goals.

• Learn your local market. While you certainly need to be up on the most recent housing news, get news from your local media outlets, your friendly neighborhood real estate agents and data providers that regularly generate information about your community.

• Get some basic training. Even if you've purchased before, bone up now. Regulations, local practices and market conditions change. Use well-established, frequently-updated information sources on and off line. Attend real estate industry-sponsored seminars, workshops, counseling sessions and post-secondary level realty classes.

• Examine your credit. Pull your credit report and check your credit score before your lender does. You need to make sure both are where they need to be to land you a home loan. AnnualCreditReport.com (also at 877-322-8228) is the one and only official, federally sanctioned program giving you free annual access to your credit report. The nominal fee to obtain your credit score from one of the three credit reporting agencies is worth the cost.

• Shop with money in your pocket. Get a mortgage approved before you begin to shop for a home. You need to know how much you can afford and how much home you can buy so you can negotiate from a position of strength. Shop around for the best mortgage possible.

• Buy like a savvy investor. Buy low now, sell high later. Shop in the least expensive neighborhood in the best community or the least expensive city in the region. Drill down to buy the least expensive home on the best block or the cheapest home in a neighborhood in transition.

• Pack a shotgun. Use your real estate agent as your point person, but spread your shopping efforts to every corner of the housing market -- classifieds, open houses, online listing portals, the distressed market; tell friends, family and co-workers you are in the market.

"For the immediate future, look for distressed properties to continue flooding the low-performing markets, which will keep sales high but hurt property values," says Stefan Walker a broker with the Los Gatos, CA office of Alain Pinel.

"In the more stable markets, the upper end will continue to cool, but record-low interest rates should keep demand relatively strong for well-positioned mid-value properties," Walker added.

- Inside the world's biggest hedge fund

Inside the world's biggest hedge fund
Bridgewater founder Ray Dalio's intense focus on principles helps him make money in good times and bad. Now he's bracing for some very tough times indeed.

Is the current downturn merely a severe slump, or are we facing a second coming of the Great Depression? That's the question everyone is asking these days. But Ray Dalio, founder of Bridgewater Associates and manager of what is now the world's biggest hedge fund, has been preparing to answer it for eight years.

In 2001 he had his investment team build a "depression gauge" into the firm's computer system, line by line in the code, to adjust the portfolio's strategy and risk profile if the economy ever entered a massive deleveraging period - the kind of multiyear process that ricocheted through the world economy in the 1930s and that has eviscerated markets periodically through the ages.

On Sept. 30 of last year, just a couple of weeks after the failure of Lehman Brothers, Dalio logged into his system and saw that the computer had flipped the switch. Bridgewater's black box is now operating on high alert.

Yet even as he is preparing his clients to hunker down for something different and more challenging than a typical recession, Dalio still expects his fund to thrive. Because his approach doesn't depend on the direction of any particular market, he explains matter-of-factly, there is no reason that he shouldn't continue to find as many good investment opportunities as he always has. Considering what he sees coming, that's a pretty bold statement.

In normal times we might be writing about Ray Dalio, 59, simply because he's one of the world's most successful investors. Since starting Bridgewater Associates out of an extra bedroom in his Upper East Side Manhattan apartment in 1975, Dalio (pronounced Dally-o) has built the firm into a powerhouse managing some $80 billion. With a personal fortune estimated at more than $4 billion, he ranks as one of the wealthiest residents even in money-soaked Greenwich, Conn.

More impressively, for the past 18 years his flagship hedge fund, Pure Alpha, which now holds more than $38 billion, has averaged an annual return of 15% before fees - gliding through the Asian flu of the 1990s, the dotcom implosion, the terrorist attacks of Sept. 11, 2001, and the current worldwide financial crisis without ever suffering an annual loss greater than 2%. Last year, when 70% of hedge funds lost money and the average fund fell 18%, Pure Alpha generated a gross return of 14%.

But these are not normal times. And what makes Dalio compelling is not just his track record but the way he goes about making money, and the rigorous analysis he applies to understanding markets, organizations, the economy, and life.

Does Dalio think of himself as one of the world's great investors? "No," he says, shaking his head, visibly agitated. "First of all, I don't know what the definition is of 'one of the great investors.' It's a totally irrelevant question. I have the fear of messing up. And that fear drives me to ask, 'Well, could this thing happen? Could that thing happen? If it happened in Japan, how do I know it won't happen to me?'"

Dalio describes himself as a "hyperrealist," in the sense that he is driven to understand the processes that govern the way the world really works, without bringing subjective value judgments into the equation. "I think the thing that makes him different is an intolerance for the inadequate answer," says Bob Prince, 50, Bridgewater's co-chief investment officer, who's been with the firm since 1986. "He'll just keep peeling back layer after layer to get at the essential truth."

In every activity in his life - from managing his firm to stalking a wart hog on a bow-hunting trip - Dalio believes in applying a carefully thought-out process to get the results he wants. That's especially true in making investment decisions. "I'm very big on having clarified principles," he says. "I don't believe in being reactive. You can't do that in the markets effectively. I can't. I need perspective. I need a game plan." To develop one, he stress-tests strategies through computer simulation across time and around the world to make sure that they're "timeless and universal." It's all about cautious - and highly educated - wagering on probabilities.

During the long boom, many hedge fund managers earned billions on big leveraged bets that stocks would rise; later, a handful made fortunes by anticipating the bust. That not Dalio's style. (In fact, he hates being called a hedge fund manager.) For one thing, he doesn't magnify his bets with a lot of borrowed money - his leverage ratio is about 4 to 1, far less than other investors have used.

Like fellow quant-minded managers D.E. Shaw or Jim Simons of Renaissance Technologies, Dalio translates his insights into algorithms and then has a powerful computer system scour dozens of markets around the world looking for mispriced assets and other opportunities. Rather than focusing only on stocks and searching for Peter Lynch's proverbial "10-bagger," Dalio and his computers concentrate heavily on the currency and fixed-income markets, grinding out consistent singles, doubles, and occasional triples. That approach, as we've seen, can be very rewarding.

Understanding the 'D-process'
Bridgewater's main office is an unobtrusive, three-story stone and glass building that sits on 22 acres of heavily wooded land in Westport, Conn., some 20 miles up the coast from Greenwich. The firm has added space in three other buildings around the area as the explosive growth in its assets under management - averaging more than 40% annually for the past 10 years - has necessitated a similar investment in new employees and technological capacity. Since 2000 its headcount has grown from just under 100 to about 800, with more than 100 people in its client services division alone.

Unlike a typical hedge fund, Bridgewater does not manage money for wealthy individuals. Rather, it works only with large institutions like pension funds and sovereign wealth funds. Right now the firm has 270 clients, about half in the U.S. and half overseas. Like a standard hedge fund, it charges a management fee of 2% of assets and 20% of profits.

But its relationship with its investors consists of much more than taking a cut of their money. Bridgewater's army of analysts provides clients with a stream of research. "I love their daily economic report," says Loews Corp. CEO Jim Tisch. "For me it's a must-read." And the analysts are always on call to perform custom jobs or offer a portfolio critique - even of allocations to other hedge funds. "I view them more as a partner than a vendor," says John Lane, the director of Eastman Kodak's $7.5 billion pension portfolio, which has had money with the firm since the late 1980s. "We don't make a major change here in strategy without calling Bridgewater to get their view."

The money-management industry has been battered by scandal and failures lately, but Lane has complete confidence in Bridgewater. "Of all the investment firms we work with," he says, "they're the most trusted." Asked head-on about the trust issue, Dalio points out that outside custodians hold customers' money and that his institutional clients aggressively audit Bridgewater's operations.