There have been 3 major inflection points in the mortgage industry over the last 30 years. The first occurred in the mid 1970s when mortgage rates were no longer set by the Federal Government and became market driven. This was a much needed change. It was the only was to maintain a steady availability of mortgage financing to the public. Up until this point with the mortgage rate being set by Washington, lenders would only focus in on mortgages financing when it made good business sense. When mortgage rates were fixed at 8.75% and lenders could charge 10.00% on business loans their focus would be to originate business loans. On the other hand if they could only charge 7.00% on a business loan then mortgages became an attractive source of business.
The mortgage market responded to changes in market rates by varying the number of mortgages they were willing to close. Once mortgage rates became market driven there would always be mortgage money available to the public, just the cost of the financing would be higher or lower depending on the overall cost of money at the time.
Once the shock of this wore off consumers slowly got accustomed to mortgage rates being differently from day to day and lender to lender. A person would purchase his home at whatever mortgage rate is available at the time. If rates come down at a later date he would simply refinance and take advantage of the lower cost of financing.
Mortgages were still a local business. The majority of mortgages were placed with local Savings Banks that served the community and kept the mortgages after they closed. This system worked well until the mid 80s when we faced the Savings & Loan crisis which forced most of the Saving Banks out of business. A new business model for delivering mortgages to the public emerged. No longer were mortgages originated by the local institutions they were now being offered through mortgage bankers and brokers whose sole business was mortgage origination. No deposits were taken in, no branch network was needed, and no car loans were written. They focused on originating mortgages, bundling them and selling them off to investors. This system worked well until we entered the third and latest inflection point, the mortgage crisis we're currently facing.
The weak point of this delivery system became painfully obvious when housing prices stopped their rapid rate of appreciation and began to depreciate. Add industry mismanagement and greed on top of a global recession and you have the disaster we are currently dealing with. This has caused the greatest change in the financial marketplace since the Great Depression.
Institutions are closing down, being taken over by larger institutions or reaching out to the government for financial assistance. This is causing a major consolidation in the mortgage market. For a lender to survive it needs access to a reliable and moderately priced source of funds. The only source of funds that meets theses requirements are deposits. Institutions that have relied on Wall Street for capital to operate their businesses cannot operate in this environment. Only banks that deal with consumer deposits can be committed to the mortgage business today.
For a mortgage broker to deliver the proper level of services to his clients he needs multiple sources of mortgage products and lenders. My analysis of the industry confirms that the era of the mortgage broker and mortgage banker is coming to an end. It's my prediction that that the market will be dominated by those institutions that are "too big to fail". Government support comes with strings attached. As long as the government needs to supply financial support to these lenders, the lenders will be obligated to supply mortgage products to the public. They will also be expected to deliver these products at a fair price.
It is for this reason that I have decided to close Shelter Rock Mortgage Corporation and partner with an institution that is not only committed to the mortgage business but large enough to stay committed. I am now working exclusively with Bank of America. It is the largest mortgage lender in the country, has a corporate culture focused on customer service and has the financial strength to aggressively price their products.
By combining the strength of the largest bank in the country with my years of experience I will be able to continue to delver the level of service that my clients expect from me. I'm excited about this transition and look forward to the benefits this partnership will bring to all concerned.
Tuesday, July 7, 2009
The Evolution of the Mortgage Market
Thursday, December 18, 2008
Revised Credit Card Rules
This article appeared in The Times Union today. It details important revisions to the laws governing credit cards. It's something we all should be aware of.
Regulators adopt new credit card rules
Consumers to be spared from higher rates on existing balances under new rules for credit cards
By MARCY GORDON, Associated Press Last updated: 9:25 a.m., Thursday, December 18, 2008
WASHINGTON -- Federal regulators on Thursday adopted sweeping new rules for the credit card industry that will shield consumers from increases in interest rates on existing account balances among other changes. rules, which take effect in July 2010, will allow credit card companies to raise interest rates only on new credit cards and future purchases or advances, rather than on current balances.
They were approved Thursday morning by the Office of Thrift Supervision, a Treasury Department division. The Federal Reserve and the National Credit Union Administration were expected to act on them later in the day. The changes mark the most sweeping clampdown on the credit card industry in decades and are aimed at protecting consumers from arbitrary hikes in interest rates or inadequate time provided to pay the bills.
John Reich, the thrift agency's director, said the rules "will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages."
Most of the rules were first proposed in May and drew more than 65,000 public comments -- the highest number ever received by the Fed. They also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates.
But the changes also could make it more difficult for millions of people with bad credit to get what is known as a subprime card carrying higher interest rates, some experts say.
In addition, consumers will have to be given 45 days notice before any changes are made to the terms of an account, including slapping on a higher penalty rate for missing payments or paying bills late. Under current rules, companies in most cases give 15 days notice before making certain changes to the terms of an account.
The changes could cost the banking industry more than $10 billion a year in interest payments, according to a study by the law firm Morrison & Foerster.
Roughly 16,000 companies in the U.S. issue credit cards. The biggest lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.
The head of the American Bankers Association called the changes "strong new regulations ... (that are) unprecedented in their scope and signal the beginning of a new market structure for credit cards."
"While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history," ABA President and Chief Executive Edward Yingling said in a statement. "With the uncertainty facing our financial system, it's absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."
The new rules prohibit:
--Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay.
--Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.
--Unfairly computing balances in a computing tactic known as double-cycle billing.
--Unfairly adding security deposits and fees for issuing credit or making it available.
--Making deceptive offers of credit.
Travis Plunkett, legislative director of the Consumer Federation of America, said customer frustrations run deep, as reflected in the comment letters submitted to the Fed.
Many of them "were spontaneous from consumers who feel they've been treated unfairly by their credit card companies and are literally begging the Fed for help," he said.
Many people acknowledged paying late, often mistakenly, and felt it was unreasonable for their card issuer to increase the interest rate on the balance, Plunkett said. Another common theme came from people who pay on time but are hit with a rate increase because the company needed to recoup losses from other cardholders, he added.
Under the new rules, credit card lenders will be required to apply any payment above the minimum to the part of the balance with the highest interest rate.
The so-called subprime cards for people with low credit scores typically have no more than a $500 credit limit but require a large upfront fee.
The rules cap that fee at 50 percent of the credit limit and allow the cardholder to pay off the initial balance over a year, not immediately.
The Consumer Federation estimates that credit card debt held by U.S. consumers is about $850 billion, some four times what it was in 1990.
----
Associated Press writer Carson Walker in Sioux Falls, S.D., contributed to this report.
Wednesday, December 10, 2008
Where We're at Now
Let me take this opportunity to wish you and your family a Joyful Holiday Season and a Happy and Healthy New Year.
A lot has happened in the housing and finance markets over the past year. In addition to the chaos in the market the amount of conflicting information being distributed by the media is overwhelming. I want to give you a factual picture of the mortgage market as it currently exists. You will then be able to determine if there are opportunities that you should be taking advantage of.
The government intervention into the market is beginning to show progress in lowering mortgage rates. The standards being used to qualify for a mortgage are conservative and will continue to be so for the foreseeable future. Any applicant with less than sterling credit will see a pricing adjustment, increasing the financing costs. No longer will a lender extend credit to anyone who cannot document sufficient income or assets.
With the softening of housing prices, applicants are required to have a vested interest in the property they are looking to finance. This means that the maximum loan-to-values on all mortgages types have been reduced.
The mortgage rate reductions that we’re seeing are applicable to conforming loan amounts, that is mortgages that are less than the Fannie Mae limit of $417,000 for a one-family home. Mortgages greater than $417,000 but less than $625,500 are currently being priced 0.375% higher with even more restrictive underwriting standards. Mortgages above $625,500 are more expensive now than they have ever been.
If you’re interested in exploring what options you have available today, give me a call @ (516) 627-0800 or write an e-mail to Don@Shelter-Rock.com. We’ll discuss how the current market conditions can be used to your benefit. Have a recent mortgage statement available when you contact me. I’ll need information from that statement to accurately calculate any potential savings.
Thursday, December 4, 2008
Prudent Refinancing in Today’s Market
Mortgage rates are finally beginning to drop. Lenders of all sizes are firing up their marketing divisions and reaching out to homeowners to solicit business. Before jumping in and refinancing your mortgage you need to make sure what your saving really will be. Is it worthwhile to refinance your current mortgage if you can get a rate that’s 0.5% lower than you’re paying? Do you need a 1.0% drop for it to make sense? The answer is, “it depends.”
The size of your mortgage, the number of years left on your mortgage, the value of your home today and the total cost of refinancing are just some of the things that need to be considered in making your decision. In most cases you will not be presented a detailed analysis by the originator you’re talking to. In many cases you are speaking to a customer service person that is doing nothing more than reading a script to you.
If you don’t have the time or expertise to do you own analysis then you have to go to a professional and have it done for you. A good place to start is to read this article, http://www.shelter-rock.com/Refinancing.htm. It will give you an understanding of what you will need to consider.
Clients contact me regularly to discuss the refinance option. Sometimes this is their first call, other times they are seeking information after another company has contacted them and they want to confirm what they’ve been told. Here are three e-mail threads that will illustrate what you need to be aware of.
This first client was approached by his current bank. They presented him with an offer to reduce his monthly payments. He wanted to confirm he was making the right decision.
Hi Don
This is [name deleted], you did my mortgage about 2 years ago for [address deleted], at one time you had called and said that if we noticed that the rate have fallen more than 1 point we should consider refinancing. I have been talking to the Chase people since they have our mortgage already and this is what they are offering.
Loan Amount: $457,000.00
Product Type: FHLMC Only 30yr
Assumed Interest Rate: 5.250
Assumed Discount Points 1.875
My outstanding balances are:
Mortgage Loan: 406,262.01 at 6.375%
Line of Credit: 27,339.59 at 4.625%
So my question is can you do better or should I even do the refinancing at this time?
Thank You
[name deleted],
It’s good to hear from you, I hope all is well with you and the family.
Dealing with the customer service people at any lender yields incomplete information at best and a sales pitch at worse. Let me give you a brief update on what’s going on. After you read this e-mail, give me a call and I’ll get more specific.
To begin with getting a drop in interest rate of 1 percent by paying points isn’t a drop of 1 percent. 5.25% with 1.875 points is the same as 5.75% with 0 points. Interest rates and points are tied together. Simply put, you can pay the bank now (points) or later (interest).
It still may make sense to refinance, but we need to take a closer look at things .To begin with, under the current pricing structure there is a 0.25% increase in rate when you move the mortgage amount from $417,000 to $417,001. I would like to avoid having you pay an extra ¼ of a percent on the entire mortgage balance. Your combined mortgages add up to approximately $433,600. Closing costs will only add $4,500 so you only need a mortgage of say $438,000 not $457,000.
If we refinance for $417,000 we need to make up $21,000 somewhere. If you have $21,000 available in cash, this wouldn’t be a bad investment. If this is an option you are considering, I’ll work out the actual return on your investment. Assuming this isn’t the preferred path, we have another alternative. We can ask Chase to subordinate your existing Line of Credit to a new first mortgage of $417,000. They could even lower the limit of the line to $25,000 and this approach will still work. In a normal market this happens regularly, today we will have to do a detail request for it with no guarantee of success.
Today you can get 5.5% with 0 points for $417,000 making it worthwhile to consider.
Unfortunately customer service personnel aren’t given sufficient training to address to specific attributes of every person they talk to. It’s an ongoing flaw in the industry. Of course, this flaw is good for my business so I’m not complaining!
Give me a call when you’re free and I’ll give you a more complete picture of what I talking about.
Don
We did have a telephone conversation at this point. I did a rough calculation to compare his current mortgage payments to what the payments would be if he went through with the proposal that was given to him by the Chase customer service person. It worked out that it would take 105 payments before he made back the money he invested is doing the refinance. I told him I didn’t think that was a sound financial decision.
The next morning he e-mailed me again.
Hi Don
I was talking to the Misses last night and we might be able to come up with the 21000 in cash, if that makes the most sense, can you please run the numbers just so we can see how it will work out.
Thank You
[name deleted],
The first thing I want you to address is the impact to your cash position in the event you pay down your mortgage by the $21,000. I don’t know the current amount of liquid assets you have on hand but I want to make sure you consider the impact to your personal financial position after you make this investment. Cash reserves are important and in the current financial market reserves are of utmost importance. I want to make sure you address the big picture and not just today’s mortgage payment.
Assuming you want to continue with the refinance, here’s some numbers. I’m giving you various interest rate with 0 points because the mortgage rates are bouncing day-to-day. Where yesterday I could get you locked in at 5.50% today it would be 5.75%. I suspect we will see rates below 5.5% by the end of the year or early next year. If you decide to move forward I wouldn’t lock-in until we see an attractive rate. I would however get the commitment and title done so we are in a position to lock and set a closing date at the same time. This way we can take the shortest lock period available and therefore the best pricing. It also gives us the opportunity to take advantage of any drop in the conforming/jumbo adjustment. If in fact the government decides to waive the adjustment, even temporarily we can take advantage of that and not invest your cash.
$417,000 @ 5.75% yields a monthly payment of $2,433.50
$417,000 @ 5.50% yields a monthly payment of $2,376.68
$417,000 @ 5.25% yields a monthly payment of $2,302.69
$417,000 @ 5.00% yields a monthly payment of $2,238.55
You need to add your escrow payment to these numbers to get your new mortgage payment. The escrow payment calculated at the time of closing may be different than you are currently paying but that will be reflective of updated property tax figures and/or insurance payments.
Don
I sent that e-mail yesterday afternoon and I haven’t gotten a response as yet. The important thing here is now this client is thinking about a refinance with enough facts to make an informed decision.
This client heard the good news regarding mortgage rates and wanted to check things out.
hey don..
how are you ? how was thanksgiving ?
i noticed some 30yr fixed rates as low as 5.375% for a high balance..
i have enough cash to get our current balance down to $625k (i believe the upper limit for a high balance loan).
if we could get that rate - it would knock approx $500 /mth off our repayments.
seeing as our money is not making anything at the moment in terms of interest.. do you think it is worthwhile looking into this ?
i guess the risk is that they value our property significantly lower.. (i presume it would need to be revalued ?) &/or i no longer qualify for a loan (even tho i already have one!!).
great to hear your thoughts.
regards,
[name deleted]
This was my response. You do need some background information. My client closed on this purchase 10 months ago with a piggyback mortgage. That is, we used 2 mortgages instead of one to avoid paying a substantially higher interest rate. At the time this purchase was being done, the mortgage rates for mortgages over $417,000 were nearly 2.0% higher that what a borrower would pay for $417,000. We used a 3/1 ARM (the mortgage rate would be fixed for 3 years and then become a 1 year adjustable) on both mortgages.
[name deleted],
It’s good to hear from you. All is fine except it would be nice to see business get back to normal. These are certainly interesting times! And we’re nowhere near the end. I wouldn’t refinance right now for $625,000. Let me give you my thoughts and we’ll take it from there.
First, in order to get the 5.375% rate you will need to pay 2 points today. So you’re really paying closer to 5.75% then 5.375%. Currently there is a 1 point or 0.25% rate increase to the pricing for mortgages over $417,000. There is a very good chance that this will change, eliminating the adjustment. This is one good reason to wait.
There also is a good possibility that we will see an additional drop in mortgage rates before they begin to increase again. The Federal Government is focusing a lot of attention and tons of cash to make that happen. There is a good probability that we will see some drop in rates in the next couple of months.
Refinancing will require you not only to pay down the mortgage but also pay for the closing costs. In addition to the $40,000 you will be investing to pay down the mortgage you will need an additional $6,000 in transaction costs.
In today’s economy liquidity is king. Keeping the cash on hand, instead of tying it up in the condo might be a more prudent course of action. When the financial markets settle down might be a better time to commit your cash into the apartment.
The bulk of your mortgage is at 5.0% and will stay there for the next 2 years before there is any possibility of a rate change. 5% is less than 5.375%, I wouldn’t’ be so quick to increase the cost of borrowing the $417,000 right now. You will be increasing the cost of financing the $417,000 by $96.55 for the next 2 years.
You are rightfully concerned about the current market value of the apartment. We would need it to appraise out for $781,300 in today’s market. You’re in a better position than I am to make that initial evaluation. We know your financial strength will be more than adequate it’s only an issue of the current market value of the condo.
I know you want to pay off the mortgage as quickly as possible and with the lowest cost of financing. Assuming you’re ready to commit $45,000 of cash to the condo. I would just prepay the second mortgage. That will bring your balance down to $200,000. Your mortgage payment will stay the same but the mortgage will be paid off in 204 months instead of the remaining 350. You are effectively getting a rate of return of 7.625% on the money you are investing. This has no effect on your ability to refinance when it makes economic sense.
Don
This is his response:
yes it is a bloody mess right now!!! i too hope things get back to normal - but i agree - it's probably a way off..
thx for the great advice as always - sounds good..
i understand your logic re putting it into the 2nd - however - based on everything else you have said - i'd probably just as soon sit tight and have the benefit of the cash on hand so i can quickly react if things do become more favorable..
best regards,
[name deleted]
Finally, we have a client who also wanted to see if he could save some money by doing a refinance.
Hi Don,
I want to see the possibility of refinancing with minimum cost. Pls refer to attd statement and advice what you think. Tks.
Rgds/[name deleted]
[name deleted],
It’s good to here from you. I hope all is well with you and your family.
Let me show you how I calculate the saving in a rate refinance. After you review it fell free to call and we can discuss it in more detail.
The analysis is to determine exactly the saving due to rate alone. It’s easy to make a refinance appear to save you money if you compare a new 30 payment to say a 20 year remaining term on the existing mortgage. We need to factor out the impact of extending the term of the mortgage over the remaining life of the current mortgage.
We start by calculating the remaining term of your current mortgage. Your current balance is $213,389.40. You are paying monthly $1,539.30. At your current interest rate of 6.25% your mortgage will be paid off in 247 payments. You obviously made some prepayments of principal over the last year. For this comparison I’m going to assume no additional prepayments are to be made. You will be paying $1,539.30 a month for the next 247 months.
There will be some cost incurred in doing a refinance. I’m going to add it into the loan balance. The exact number isn’t important so I’m going to work with a new mortgage amount of $217,000 to cover any closing costs.
The current interest rate is 5.5%. If I take a mortgage amount of $217,000, an interest rate of 5.5% and a term of 247 months I come up with a payment of $1,469.53. This is a saving of $69.77 a month.
$217,000 – 213,289.40 = $3,710.60 is what I allocated for closing costs. $3,710.60/$69.77 = 53.18. That is it will take over 53 payments before you received your closing costs back. I recommend refinancing when this number is 24 or less.
Of course it’s your decision and I will be happy to take care of the refinance for you but I would suggest waiting to see if the rates drop to around 5.0% before refinancing. I’m not predicting we will ever see that rate, but I feel we need to be closer to 5.0% before a refinance yields adequate savings.
What’s your opinion?
Don
Hi Don,
Tks for the msg and really appreciate your honest opinion. I perfectly u/stand your point and know you are looking after my best interest and giving these scenarios. Will wait and see how market works in the future. Again thanks for the time taken to write detail msg below.
Take care.
B.rgds/[name deleted]
This is common mistake. The remaining term on the existing mortgage is ignored giving the illusion of greater savings. The older the original mortgage is or if a prepayment of principal was made the greater the illusion. If I calculated the mortgage payment based on a new 30-year mortgage the payment would be $1,232.10. It would appear there is a potential saving of $307.20 per month ($1,539.30-$1,232.10). $69.77 of which was due to the lower interest rate and $237.43 due to extending the mortgage payments out and additional 113 months.
There may be a need to lower the mortgage payments now that supercedes the downside of extending the term. Then, by all means the refinance should be done. You need to make the decision based on facts and your personal financial situation. Whatever you do, you want to do it for the right reason.
Friday, November 14, 2008
Bailout Dilemma
It’s no secret that we are currently in a recession. The government is exploring various approaches in trying to get the economy on the right track as quickly as possible. Which industries should be bailed out? Which companies should be offered financial help? How much aid is too much? Should homeowners be bailed out directly? Which homeowners should be bailed out? How much help should be given? The questions go on and on and we can only guess what the right answers are. It’s only in looking back years from now will we be able to judge the success or failure of today’s decisions.
We live in a society that has grown accustomed to instant gratification. We expect instant results whenever we do something. We expect our associates to answer their cell phones on the first ring; e-mails need to be answered within minutes of hitting the send button. Shipping of anything is expected to be done overnight and we are annoyed when our computers take more than 30 seconds to boot up.
With this level of expectation we expect the government to turn the economy around overnight and we are disappointed when a program is implemented and we don’t see positive results within a matter of days. It’s important to recognize that there is nothing that can be done that will make this a short recession. We will be in a much stronger position to deal with this economy if we recognize that fact.
In my article, “Today’s Financial Paradigm Shift” I pointed out that we, as a society, need to change the way we handle our finances. Society’s resistance to this change is only going to make matters worse and this recession longer. Let me list a few examples.
It’s fair to say that the average American doesn’t save enough. Statistics show that our nation’s saving rate has been 1 to 2% on average over the last several years with it drifting into negative territory at some points. Statistics also show that the average American lives day to day off their credit cards not even paycheck to paycheck but day to day. It’s generally assumed that we would all be better off financially if we increased our rate of savings.
We’re told that one of the reasons the economy is in the state it’s in is that we are living above our means. This applies not only to individuals but companies and the government. We can conclude that for us to have a vibrant economy we need to curtail spending and increase our savings. By being less credit dependant we’ll all be better off.
What approach has the government used to stimulate the economy? Last year they gave every American a rebate check and encouraged them to go out and spend it. This didn’t have any long-term impact so now they are considering doing it again.
The price of gasoline has dropped substantially over the last few months. The economy still isn’t getting stimulated because Americans are paying down their debts instead of spending the money. This is perceived as a negative because it’s not turning the economy around in the short term. It fact it is making for a stronger economy in the long-term. This change in spending habits should be encouraged, not discouraged.
We are told that Washington bailed out Bear Stearns, Fannie Mae & Freddie Mac and the money could have been better spent somewhere else. There may have been better ways to spend the money but I have a problem with identifying these actions as a bailout. The owners of Bear Stearns, the stockholders, loss 90% of their investment in the company. The stockholders of Fannie and Freddie lost 100%. These stockholders are no better off than the stockholders Lehman Brothers, which was allowed to go into bankruptcy. The cash infusions into the major banks, insurance companies and possibly the auto manufacturers is enhancing shareholder value, making those investments bailouts.
Were these decisions the right decisions or the wrong decisions are open questions. We do need to avoid calling all these actions bailouts, since clearly not all of them are. We are again attempting to address the short-term economic problems with the same actions that got us into trouble in the first place. These companies were making investments outside their means getting them into the same financial hardships consumers got into when they spent above their means. Unfortunately we need to deal with painful short-term problems if we hope to attain a long-term cure.
The latest focus of Washington is to address the high rate of foreclosures throughout the country at the homeowner level. A foreclosure not only hurts the homeowner and his lender but the local community also. If the number of foreclosures is reduced there will be an economic boost at the local level that will permeate though the entire economy.
This approach also has a “feel good” component to it. We, as a society, are helping out our neighbors that need it the most. Theoretically this seems like the perfect way for the government to invest in the greater good of the economy and it may turn out to be the most viable approach to the problem. It also can prove to be the most devastating if it is not handled very carefully.
There are 2 pitfalls that need to be avoided. The first one is finding the proper balance between helping out those that need help without encouraging other homeowners to put themselves in need. For example, if you decide to help out any homeowner that is currently 60 days behind in their mortgage payment you are also announcing to any homeowner that is 30 days late that they should miss the next payment. Whatever guideline that used, this problem will arise making this a difficult issue to address.
The second pitfall is even more difficult to deal with. The most common reason homes are falling into foreclosure in many parts of the country is that the current value of the home is less than the outstanding mortgage balance. This situation can occur for several reasons. The cause that put the homeowner underwater must be considered in determining if a mortgage should be modified or else we will be assisting borrowers that don’t deserve to be helped.
A homeowner could have been scammed into purchasing an over priced house due to a fraudulent transaction. Obviously this is a situation where the mortgage should be modified.
The real estate market could have dropped substantially since the homeowner closed on his house. Should his mortgage be modified if the mortgage balance is in excess of the resale value of the home? What about his neighbor, who made a substantial down payment when he bought his house, should something be done to help him? Is it fair to help out the first borrower who didn’t invest as much of his own capital in the purchase and ignore the neighbor who decided to do the prudent thing and carry a smaller mortgage?
What about the homeowner who bought his house 5 years ago, refinance it last year taking as much equity out of the house as possible who is now underwater with his mortgage? Should this mortgage be modified? Should it make a difference if he took the money and invested in upgrades to the house, paid off other bills with it or just took a vacation?
The banks will have to be selective in deciding which mortgages to modify. The effect of this selection process will be (1) homeowners who genuinely need to be helped getting help, (2) homeowners who shouldn’t be helped getting help and (3) homeowners who were conservative, did what they thought was the prudent thing to do and are just hanging on watching from the sidelines.
The animosity this will cause between neighbors needs to be considered when addressing foreclosures on the local level.
In attempting to turn this economy around in the shortest period of time and with the least amount of pain we run the risk of encouraging people to continue with their bad spending habits. We need to take advantage of this recession by encouraging people to live within their means and save for their futures. By taking the pain of this recession and turning it into an opportunity we will all benefit. We just need a little patience.
Tuesday, October 28, 2008
Security Alert
I just received this security warning from the FDIC and wanted to pass it along.
The Federal Deposit Insurance Corporation (FDIC) is warning consumers, businesses and financial institutions to be aware of fraudulent e-mails allegedly from, or related to, financial institutions that have been the subject of recent news stories. Phishing e-mails often incorporate aspects of high-profile news stories – such as bank mergers, acquisitions and failures – to create a sense of urgency and legitimacy for requesting information or action.
These types of fraudulent e-mails may request recipients to verify computer logon credentials, update personal information, or activate new online security features. The fraudulent e-mails may include a link that directs the recipient to a fraudulent or "spoofed" Web site that looks similar to the subject institution's legitimate Web site. Once there, users may be prompted to provide information about online banking credentials or other personal and confidential information that could be used to gain unauthorized access to online banking services or perpetrate identity theft. These spoofed Web sites may also direct the user to download software updates or digital certificates, which may actually be malicious code or software attempting to collect online banking credentials or other personal and confidential information.
Consumers, businesses and financial institutions should be wary of unsolicited e-mails purportedly from financial institutions recently in the news and take the following precautions:
Be mindful that financial institutions generally deliver notices to consumers in writing about changes in account terms and conditions unless the consumer previously agreed to receive the notice electronically.
Friday, October 17, 2008
Today’s Financial Paradigm Shift
A Paradigm shift is a radical change in personal beliefs, complex systems or organizations, replacing the former way of thinking. The chaos we are dealing with today’s credit market is a Paradigm Shift of unprecedented magnitude.
The use of credit has evolved drastically over the last several decades. Individuals as well as businesses of all sizes including all levels of government have redefined the proper use of credit. Up until recent times, borrowing money was something that wasn’t done without careful consideration.
Consumers borrowed money only as a last resort to tie then over a rough patch. An illness prevented then to earn a salary; a lay off required them to find new employment or an emergency repair was needed. It was only conditions such as these that Americans borrowed money in previous generations. Then a new need surfaced. That was a desire to buy goods that were expensive and had a long useful life. Through a combination of savings and borrowing money we were able to buy the cars and the homes we wanted.
Our grandparents hated the idea of owing money to anyone. They reluctantly borrowed money when needed and looked forward to the day the loan was paid off. Families checked off the major events in their lives; getting married, having children, raising a family and retiring their mortgages. The mortgage burning party was a more major event than a birthday.
Their pride kept them from taking on too much debt. In the event something happen in their lives that forced them to fall behind they were ashamed. They wouldn’t talk about it and would do whatever possible to hide the fact. The goal was to pay back what was owed before any friends or family heard about it. Bankruptcy was considered the ultimate failure. A man failed his family and his community if he was forced into bankruptcy. The people of this generation didn’t go into bankruptcy; they were forced into it.
These people saved for things they wanted to own. As children we were all taught to save our money for what we wanted. We learned by example, we made compromises. Our families couldn’t buy us everything we wanted, we needed to prioritize. We could only expect the toy we really wanted, anything else would have to wait.
As time passed we became more self-centered. Borrowing evolved from being something to be embarrassed of to an acceptable way of life. We no longer used Christmas Clubs as a saving plan to pay for holiday gifts, we just charged the gifts and planned on paying back what was borrowed at a later date. However, paying back the money would limit what we could spend on other things. This wasn’t acceptable; any form of sacrifice just wasn’t in our nature. We just kept borrowing more. Paying back what we borrowed was always something that could be put off until tomorrow.
As we continued running our personal lives this way some of us had jobs that gave us the responsibilities of handling the financial obligations of companies and government agencies. The spend now; pay later attitude that became the norm at home naturally became the norm at work. Companies and the government began doing the same thing. From a business standpoint having cash-on-hand was not the most efficient use of capital. Invest whatever capital is on hand and borrow funds as needed to pay bills while you are waiting to collect on your receivables.
Once the stigma of borrowing money was no longer a concern, it wasn’t long before “living up to your word” became an outdated concept. Utilizing any method available to avoid paying a bill quickly became the expected way of conducting business. Bankruptcy was no longer the ultimate embarrassment but became a valuable tool to be used by individuals and businesses as needed.
In 50 years we have financially evolved as a country from “neither a borrower nor a lender be” mindset to a “let’s live for today” way of life. 2008 became the year of reckoning. We live in a society that needs credit to survive yet we’ve entered an age where no person, company or bank trusts anyone. Banks are afraid to lend to companies. Companies are afraid to extent credit to consumers. Banks are afraid to lend to each other. We are now force into a Financial Paradigm Shift.
Every person and company needs to immediately change their standard operating procedure and begin to conduct themselves in a similar manner that our grandparents did. The problem we are facing is much like that of a dieter. After many years of small incremental increases of weight year to year the dieter is now trying to reverse the trend in weeks. The only difference is that the dieter acknowledges that a change in needed and knows it’s not going to be easy.
As Americans we are in a financial state of denial. We’ve yet to recognize how each and every one of us contributed to the crisis. We spend our days trying to figure out who is to blame for our troubles and refuse to consider our personal contribution.
We can’t blame the lender for giving us the financing we asked for to buy the house we couldn’t afford. We can’t blame the lender for giving us the second mortgage we needed to pay off our credit card debt and buy that big screen television we desperately wanted. We can’t blame the car company that built the SUV that we couldn’t live without and then arrange for the financing that enabled us to buy the vehicle.
Why are we surprised that the creditor that lend us the money to buy the car actually wants to get paid what he’s owed? Why are we surprised that he’s willing to take the car away from us because he hasn’t gotten paid when the car is worth less than what is owed? Why are we surprised that the utility company turned off the electric when they know for a fact we just don’t have the money to pay the bill? Why are we surprised that we can no longer borrower money to support the lifestyle we’ve grown accustomed to?
Every decision made by a company, bank or government was made by a person or persons. The decision may prove to be right or wrong. The decision may have been made with the best of intentions or motivated by pure greed or stupidity. The only thing we have direct control on is the individual decisions we make. Just as the dieter looks at himself, realizes a change needs to be made and addresses his lifestyle to suit we need to objectively analyze our personal financial shape and consciously made the required changes.
Until we make a Financial Paradigm Shift in our personal lives our country will not be able to weather this storm. It’s a massive undertaking that requires all of us to do our part. We need to stop feeling sorry for ourselves and begin to move forward with change.
