Archive for December, 2009

The Fed and the Crisis

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The Fed and the Crisis

For anyone wishing to understand what the Federal Reserve actually did, and will continue to do in dealing with our current financial problems, here is a link to a San Francisco Fed web site where you will find a goldmine of facts and commentary.

It’s a great resource dealing with the process of digging out of the hole and getting back on track.

Maybe one day they will do an equally good job on their failure to prevent all this from happening. As far as I can see they did not have the courage to take away the cookie jar when this Bubble was so obviously getting seriously inflated.

Turns out that Mr. Greenspan really let us down by failing to spell out what was happening, and take the risk of being unpopular with his Political Masters. Like many before him he seemed to buy into the “New Paradigm” myth. Remember that phrase during the run up to the Dot Com bust.

How To Refinance

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This is a great time to refinance into a long term fixed rate mortgage, but it’s not always obvious how to do it in order to ensure the best combination of interest rate and costs, specifically Points. 
For example, the lowest rate is not automatically the best deal. This depends greatly on how long you plan to stay in the property.
My rule of thumb is if you expect to be moving within 5 years go for the lowest cost you can get and accept a higher rate for that short period.
If you expect to live there for more than 5 years pay some of the costs up front in order to get the lowest rate for many more years.
Next, take your preferred strategy to 4 different possible Lenders:
1. Your current Lender.
2. A local Credit Union.
3. A good Mortgage Broker.
4. A Major retail Bank i.e. BofA etc.
Ask each to give you a quote based on your situation. If you are not asked how long you plan to stay  in your  house get up, walk away, and go look for a professional.
One more thought. If tempted by an online or other mortgage advert, good luck, but be wary of the very common bait and Switch tactics often used in this business.
And last but not least, be aware that APR is a very flexible statistic which can be manipulated and interpreted in numerous ways. It is not a valid way to sellect a mortgage.

The True Meaning of “Sub-Prime”

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In the world of smoke and mirrors called “The Finance System” the word PRIME has two very different meanings.

One is PRIME RATE (the interest rate banks charge their best clients. Normally 3% above Fed Funds Rate.

The other is SUB-PRIME to describe a mortgage (SUB-PRIME MORTGAGE) that should never have made. Hence the “The Sub-Prime Mortgage Crisis“.

In the real world occupied by most of us “Ordinary Folk” the term Sub-Prime should not be linked to a Mortgage; It actually refers to the Borrower of the Mortgage i.e. The person whose Credit, Income, and/or Cash for down payment is not good enough to get a ”Prime” Mortgage. Hereafter referred to as The Sub-Prime Borrower.

This person has always been with us. Until the unbridled greed and avarice of Banks and Wall St intervened with their “No Possible Homebuyer Left behind” programs these folks rented until such time as their financial situation allowed them to qualify for a sensible mortgage.

Let’s be clear on this. The Sub-Prime Mortgages were and are High Risk loans made to High Risk people. These loans could only be made if the Bank knew it could sell them on to a 3rd party before the inevitable late payments started. This way the Banks got their profit with effectively no responsibility for the future performance of the flakey loan.

It was effectively a game of “Pass the Parcel in a Bagdad Pub”.

By the time these loans started going bad they had spread throughout the Worlds Financial systems leading to the current situation so often referred to as the Sub-Prime Mortgage Crisis.

At the end of the day we have a large number of Banks and other Wall Street hot shots who  made enormous profits by selling what they all knew to be an unstable product to an undereducated public.

This is a recurring story in our history.

If you don’t want to become a victim of the next wave then you need to get educated in how the system really works before you meet the next Bernie Madoff.

For some thoughts on how you might do this check out my posts from 04/25/2008 “Kick Start the Kids”.

Praise Where It’s Due

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A small but very welcome glow of sanity from a historically well run Bank.

After acquiring $117.3 billion dollars worth of option adjustable rate mortgages (ARMs) in its acquisition of Wachovia last year, banking giant Wells Fargo is now practicing a rare but effective loan modification strategy: the cramdown.

Through September of this year, Wells Fargo has forgiven an average of $46,000 on approximately 43,500 high-risk loans in its portfolio. The typical debt reduction is around 20% of the loan principal, though in rare cases Wells Fargo has cut as much as 30%. Reports put the six-month default rate of loans modified by Wells Fargo at 15-20%, less than half the current rate of 40% suffered by the rest of industry’s extend-and-pretend modifications.

Debt reduction is only one of many tools Wells Fargo is using to aid its distressed borrowers, and is currently not being used as a blanket fix for all underwater homeowners.

My Opinion: While this is a national story and certainly only a very small slice of the current problem pie, a mortgage lender taking into account the need for principal reduction is a big acknowledgement that the underwater state of many homeowners’ mortgages require this type of treatment. This is something other lenders and Congress need to understand when considering the mortgage quandary. Continuing to “kick the can down the road” with “extend and pretend” modifications will do nothing to solve the massive negative equity problem. The fact that the small glimmers of hope — in the form of cramdowns — are coming from a lender and not the regulators really speaks to the hands-tied, head-buried-in-the-sand mentality which must be overcome if we are to move ahead with a recovery.

Re: Wells Fargo Cuts as Much as 30 Percent in Principal from the Wall Street Journal