Bill McCord's Blog

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

Government is often criticized for putting all its efforts into helping business and nothing for the ordinary citizen. However, when they do put programs in place we have a tendency to ignore them.

Here’s just one example:

A 401-K plan usually involves an employee putting up to 6% of their salary into a company sponsored program. Typically the employer increases that contribution by adding in up to 50% of what the employee puts in. (this is increasingly being reduced but is still at least 25% in most cases). This means the employee is getting between 25% and 50% interest on their savings, plus their contribution is exempted from Income Tax for the year it is made.

So how come only 7% of people eligible for this benefit actually use it up to the max allowed? (Source Putnam Investments).

How come 20% of participants in these plans have actually reduced the level of contribution during the past 2 years?

My guess is that a large number of these people would like to maximize the use of these plans but don’t know how it could be done.

I also suspect that a large percentage of them could solve the problem with a mortgage better suited to their circumstances.

This was originally posted June 30^th, 2008. After this text I’ve added an update to Ted and Alice’s situation.

 What would you do if I offered to lend you money and charged 4% interest rate?

What if I could also show you a cast iron secure investment that would pay you a minimum 25% per year if you re-invested the money you borrowed from me?

Here is a true story.

Ted and Alice had bought their house in 1999 with 10% down, getting a 90% 3 year fixed loan, which required Private Mortgage Insurance.  ($219/m). By 2003 the value had gone up to where they could get an 80% loan with no PMI.

 When we met to discuss a possible refi I found out that during those 3 years Ted had not been able to pay in to his company 401-K program. This plan had the company match his contribution by adding 25% to whatever he put in (up to 6% of his salary). In addition, neither of them had made any contribution toward the ROTH IRA’s they were entitled to.

By refinancing into an 80% Negative Amortizing Loan with *World Savings they were able to fully fund Ted’s 401-K, AND make the maximum allowed contribution to ROTH IRA’s for both of them. They were paying $800/m less than the interest on the new loan.

What was actually happening was they were borrowing $800/month from themselves (The equity in their house) at an after tax rate of 4%, and investing most of it in Ted’s 401-K at a guaranteed 25% return. The IRA contributions were just icing on the cake.

This is not magic. It is simply making sure that your mortgage is designed to best fit your current situation, AND long term plans.

At the end of 1 year they owed $9,600 more on their mortgage BUT had accumulated $9,760 in Ted’s retirement plan, PLUS $6,000 in their IRA’s. I make that a net gain of 30% in the first year from nothing more than some intelligent Mortgage and investment planning.

This example is just the tip of the iceberg showing what can be done with a little knowledge and an open mind.

Now here’s the answer I got from Ted when I recently asked how they were doing.

 “I love my loan. Two months ago I was at 3.18% fully indexed. This month it jumped up to about 3.68%. After having this loan since March/April 2002 I have paid off about $80K in principal and well over 50% of my bi-weekly payment is going to principal reduction. I can understand how this kind of loan could be abused by people who didn’t understand it but that is the problem with THEM, NOT the Loan. For us it’s been a Blessing. Thanks a million Bill.”

The moral here is that your Mortgage is a financial planning tool. As with all tools it can be used correctly to your benefit, or incorrectly to your detriment.

* World Savings had the only intelligent Negative Amortization Mortgage. All others were ticking bombs and have been exploding all around us for the past year or so.

In todays crazy world we all know people who are struggling to get by. Here is information about some sources of help not commonly known about.

There are many free, low cost, discount and income-eligible services offered by government agencies and trusted sources. This link will take you to many of them http://www.takechargeca.ca.gov/campaigns/free.shtml.

You can also obtain this list from the Department of Consumer Affairs at (800) 952-5210. Visit their website for information on a multitude of programs provided by the State for all of us.  www.takeChargeCA.ca.gov 

The list of free and low cost services help California consumers save money!  Want a free or low cost hair cut, or manicure?  Looking for help paying for a Smog Check, or just some basic coupons for household products or food?  It’s all there and much, much, more.

The following quote is from The Economist Magazine

“Everybody wants it. Nobody understands it. Money is the great taboo. People just won’t talk about it, and that’s what leads you to the subprime mess. Take the greed and financial misrepresentation out of it, and the root of this mess is massive levels of financial illiteracy.”

 I’m one of the famous “Baby Boomers” (born between 1946 and 1964) who, if you listen to the mainstream media, are both the cause and the solution for everything wrong with the world. This is a very simplistic view, but it in one very important area I totally agree. PERSONAL FINANCE.

Our parents are children of two World Wars and a major depression. Personal finance was not a complicated issue. The Boomers are the first generation to grow up in a financially complex world while having more money to invest than their parents. They are bombarded with conflicting opinions on how best to spend and invest their money. The vast majority of the advice comes from sources which have more interest in how to separate you from your money than from increasing it.

How did they learn to navigate this brave new world? Some have been fortunate enough to choose parents who were knowledgeable enough to educate them. A few will have recognized the weakness and taken the time to educate themselves. Unfortunately the large majority did not even realize there was a problem. These are the “Goldfish” referred to in my earlier blog entry.

My concern is with the next generation, hence the title of this item. The Kids.

How are financially uneducated parent going to teach their kids how to survive in the increasingly complex financial water we are swimming in.

Here’s a suggested starting point for those who acknowledge the problem but need help with the solution.

Buy and read “The Only Investment Guide You’ll Ever Need” by Andrew Tobias, then try to make sure your kids read it before they ever receive a single dime of their own to spend. if necessary pay them to read it and discuss it with them.

You may well find the whole topic more interesting after this, so here are a couple of other books which will prove it can also be very entertaining.

1. “Freakonomics” by Steven D Levitt & Stephen J Dubner.
2. “The Undercover Economist” by Tim Harford

In addition, here is an excellent web site www.mvparents.com/ dealing with this topic and many other issues regarding our children

In my opinion, if your kids can both read and understand how money works you have given them the best gifts any parent could ever give.

Recommendations’ for other books etc will be welcome.

The following is a question posted recently by an individual on Trulia Voices

“CAN SOMEONE GIVE ME CONTACTS OF REALTORS WHO ARE WILLING TO TAKE $4,000 AND DO MY PAPERWORK. I HAVE A HOUSE IN

Which i am interested . I have decided and know what i want to offer. I just want a realtor to make my offer and do the paper work. I want the total commission back ( 2.5% – 3%) and I’ll pay the realtor $4000.”

(Unedited for grammar)

This has stirred up a in increasingly strident series of answers from agents, and responses from the originator.

The originator is a rather opinionated, ethically dubious, and extremely ill informed person, but is perfectly entitled to ask the question without being subject to the level of vitriol which has come back.

The question of negotiable Real Estate Commisions continues to haunt our industry. I can’t claim to know the best way to resolve the question. However, I can reliably predict that we are going to have to develop a system which supports and regulates a structured Service Model to allow Buyers and Sellers to choose from a Bundle of Services offered on a sliding scale fee system.

The best Realtors have already left the 20th Century behind and are working co-operatively with a new generation of technology savvy consumers who know that Norman Rockwell is dead.

The $4,000 question is just a request for someone to perform a finite task for a fixed fee.

Is that really such a strange concept.

These days when every mass media empty suit is competing to see who can spread the most gloom and doom let me point out one very positive outcome of all this, especially for the Real Estate Market.

It’s great for mortgage interest rates. When stock markets go down it’s because a lot of people are selling. Where do you think they put the money received from the sales?

How about the traditional safe haven BONDS? This drives up the prices on Bonds.

When Bond prices go up, interest rates go down. That is exactly what happened yesterday when we saw 2 reductions and modified rate sheets during one day.

If your mortgage was in process you might have received a call late yesterday to discuss locking in the interest rate.

Do you know anyone who’s 401k has gained during the past couple of years? How many people realize that their 401k is actually gambling money in a rigged game?

If you had invested $1,000,000 in the S&P 500 0n Jan 1st 1973 and withdrawn $100,000 per year (inflation adjusted) on Jan 1st of each following year you would have run out of money in 9 years!

Had you invested the same $1,000,000 on Jan 1st 1982 and made the same yearly $100,000 withdrawl you would have accumulated $4,500,000 by Dec 31st 2007.

How many of us are conceited enough to believe we would have avoided the 1st choice in 1973, AND chosen the same strategy in 1882?

The Stock Market is GAMBLING. That may be exciting but it’s not the smart way to accumulate the wealth we will all need in order to enjoy a comfortable retirement. It is most certainly not the place for the money you expect to live off for your last 30 years or so.

Source of Data was BTN Research http://www.behindthenumbers.com/

Any and all comments are welcome.

I don’t deny we’re going through tough financial times. However, I would like to suggest some positives amidst all the gloom and doom emanating from our so called “experts” in the media. Let us remember it is their job to sell more advertising, not to give us the factual news.

1. 93% of all U.S. Mortgages are being paid on time every month.

2. Mortgage interest rates are the lowest in 5 years.

3. For the first time in many years it is a Buyer’s market.

4. There is an ever increasing number of great 1st time buyer programs being     created by Federal, and State Governments, and from the Counties and Cities in and around Silicon Valley.

5. There is still an up to $8,000 tax credit on offer for 1st time home buyers.

6. Any intelligent Seller is going to be willing to give credits toward Buyers closing cost.

Now, if we can just get more of this news out we can start restoring normality into our business.

For some people this market is a great oportunity. Obviously the 1st time buyer who thought they had missed the chance to own their own home, but less obviously, the existing homeowner wishing to move up. Though he might get 25% less than a year ago, he will also be able to buy at 25% less on the more expensive home. Selling a $600,000 home at $450,000 then buying a $1,000,000 replacement for $750,000 is pretty sweet. Lastly come the Investors. Individuals and groups of people able to buy at super low prices and either hold for long term income, or fix-and-flip for quick profit.

Wherever there are losers there will be winners. That’s the system we live under.