Wise Advice from Finance Gal SF

The Grinch that stole the money that isn't there

2009-12-29T17:04:00.001-08:00

The Grinch that stole the money that isn't there

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Those that Provide Housing

2009-12-29T10:34:00.000-08:00

Dear Editor,
I prithee - drop this dirty word landl**d from the San Francisco Business Times company dictionary. It is an insult, a holdover from a time of fiefdoms and indentured servitude. Using medieval terminology to label one half of the housing providing relationship is like labeling married couples either Lord of the Manor or Wench. Tenants and Renters carry no such connotation burdens. If they did, landl**ds could expect a hefty portion of all crops harvested to be tithed to them, and no habitability expectations either. As long as San Francisco Business Times persists in employing Wizard of Idioms, it is only fair to refer to all Renters as Landvassals. Since there are no Landl**ds in this day and age, San Francisco Business Times should be using modern terms like Housing Providers or Rent Control Victims or Involuntary Subsidizers - one must consider it possible that poorly considered nouns promulgate poorly balanced discussions. I respectfully request that m'lord and m'lady consider this humble housing provider's request.

WRITTEN IN RESPONSE TO:
Friday, December 25, 2009 Our view - Canceling condo conversion lottery would help S.F.
San Francisco Business Times
"Home ownership, by and large, tends to improve communities....This is generally accepted civic wisdom — except in San Francisco, where progressives have enlisted the Board of Supervisors in an ideological quest to squelch home ownership wherever possible...Circumstances have indeed shifted over the past decade. Evictions have fallen by nearly three quarters, even as the TIC market has boomed and the condo conversion backlog doubled. So the rhetoric that more TICs and condos equal more displaced tenants is at best less than the whole truth, and at worst statistically false.. .San Francisco has a rental housing shortage because the same progressives who insist on maintaining the condo lottery also work to make it as difficult as possible to be a residential landlord in the city. As we’ve stated before, left-leaning supervisors and their supporters don’t need to learn to love private landlords. Learning to live with them as a civic necessity would be an advance. If they did, the condo conversion issue would probably cease to be one..."

Recourse and Banks

2009-11-12T08:49:00.000-08:00

We thought we were protected from Debtor's Prison. If the value of the collateral falls below the balance of the loan, what recourse does the lender have? Let's use an example: I need ten dollars. I ask you to loan me ten dollars, and offer to put up my fancy card room table as collateral. The table is worth a hundred dollars, I say. So you loan me the ten dollars, I sign a Promissory Note, promising to pay you back in one year, with interest at 1% per month, 12% per annum. So a year goes by, and I tell you I bet the 10 bucks on the ponies and lost it all. You come to take the table, and it turns out to be a folding table worth five bucks at a flea market. You repossess the table, but are still short the interest I owe, and the rest of the loan. What recourse do you have? Hey, you already took the collateral, now what? You sell my payable to a collection agency, or place a personal lien against my name that ruins my credit. So, I am out the table, the ten bucks is long gone, and now I cannot get another loan until I pay you the now fifteen dollar balance (what with late fees and penalties and all). But what if the collateral is your primary residence? Don't homeowners have an exemption from being chased to the ends of the earth by Lenders after foreclosure? Not hardly. We Californians are protected somewhat by statute, but only to the extent that the loan was used the PURCHASE the home. You default on an Equity Line, they come after YOU. You default on a refinance, they come after YOU. I am not sure how many of these types of personal liens are being pursued right now, but rest assured, Bankers are not famed for their compassion.

Inflated Investment Grades

2009-08-20T12:53:00.001-07:00

Inflated Investment Grades

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COURTESY FEES = BAD MANNERS

2009-07-26T21:51:00.000-07:00

COURTESY FEES = BAD MANNERS

Insurance companies are not in the business of making it easy for you to get money from them. Insurance is betting, pure and simple. I bet I’m going to die young, then all my friends get a great big party, and I only paid a pittance in premiums before I died. Hah! In the case of automobile insurance, it is THE LAW that you carry insurance, so a little less like betting here. Yesterday, I was asked to look over an insurance invoice, and my first question was why are you paying monthly? My client insures three cars in Oakland. The premiums run about $1,224 every six months. Insurance Company X extends to us, their customers, a kind and courteous offer to allow us to pay them only one-sixth of that amount every 30 days. For this fine gesture of goodwill, Insurance Company X will charge us a piddling, not worth mentioning “courtesy” fee. It will only be $3.50, just three dollars and fifty cents, pocket change, really.

Here are three reasons you should NEVER pay your insurance premiums monthly:

Reason #1: $3.50 translates to a drastically high interest rate to pay on borrowed money. It doesn’t seem that way, I know, but here is the math:

$3.50/$204 (monthly payment) = 1.716% a month. That doesn’t sound so bad, but let’s annualize it. 1.716% times 12 = 20.5% annual interest rate. To put it another way: $3.50 times 6 = $21.00. That’s $21 dollars in fees every six months. $21.00/$1,224 (twice yearly payment) = 1.716% times 12 = 20.5% interest rate
So you are paying 42 dollars a year for the privilege of giving Insurance Company X one-sixth of what you owe them on a monthly basis.

Reason #2:
If you overpay, they will refund your money. If you miss a single payment, it could cost thousands to re-instate with a new carrier.

Reason #3:
If you do not remit funds within the short window (10 days in some cases) you have given them the right to cancel your policy every 30 days. If it was me, I would rather they have this power only twice a year, not twelve times a year.

So think carefully before allowing Insurance Company X to extend you this wanton “courtesy”. It all adds up.

Wise Advice in the San Francisco Examiner!

2009-07-15T18:00:00.000-07:00

Greetings Blog Followers!
Here is the link to my Page in examiner.com:

http://www.examiner.com/x-16414-SF-Personal-Banking-Examiner

I am writing more, keep an eye on the updates.

Regulate to Zed and run out of alphabet...

2009-07-08T02:58:00.001-07:00

Reg Z is about to be revised, and we need to be talking about what has changed and what hasn't. Particularly, the APR calculations still don't take the potential index increases into account, so the "Truth In Lending" disclosure is still terribly misleading. It is hard to sell against the Federal Government when you are trying to convince the borrower that the much vaunted APR is a lie when applied to ARMs and Intermediate ARMs. Since indeces have dipped to the 1.0 level, the fully adjusted rates look way better than fixed, and that is a bad thing. They are a fine product, but the index will NOT remain fixed, like the APR calculations want it to.

Yield Spread Premiums - Why They Matter

2009-06-25T13:11:00.000-07:00

All loans are priced to consumers at a retail rate. There is always a markup. This markup goes by various names like “yield spread premium” or “negative points”. A point is one percent of the loan amount. Every player in the finance industry takes a cut. This holds true for fixed, adjustables, firsts and seconds, but the pricing gets a little more complicated with adjustables.

Most of us understand that when you are shopping at Macy’s or even Costco, the store gets your goods at a lower price than the one they charge you to buy it. Where the nature of this pricing differs is mortgages give you the ability to “buy down” your ultimate Note Rate – the rate that is printed on your Promissory Note. The rule of thumb is that for every point you are willing to pay, the Note Rate can be lowered by one quarter of one percent. The thirty year fixed mortgage rates that are published by Fannie Mae have always reflected some points paid up front, so they are actually understating consumer loan costs. When you look closer at the data , for instance, Bankrate.com's weekly national survey of large banks and thrifts conducted June 10, 2009 states “Rate: 5.95 percent (30-year fixed) Average Points: 0.42”, translate that into a zero points rate of approximately 6.1%.

Bear in mind that upfront points (or discount points) are non-refundable, and the payback period is between four and five years. Your payments are less than they would have been for the length of the loan, but for the first five years, you are still not ahead. Fortunately for the big banks, (let’s call the lender CitiChaseWellsAmerica – as they are hardly discernable from one another), almost all of their borrowers move or refinance every five to seven years. Most borrowers will refinance or move much sooner and they’re banking on that. They also know that their borrowing costs are much much lower than 6.1%. They pay depositors some interest to hold their money, or the capital markets an interbank rate to get this money for loaning out on mortgages. What is your bank paying on your deposits? Less than 1%? The London Interbank Offering rate is a little over 1% too, which gives CitiChaseWellsAmerica a 5% markup/profit margin. Wouldn’t you like to be earning 6.1% interest instead of 1%? So would many other buyers of Mortgage Backed Securities. As a matter of fact, they are willing to pay a premium to get this fine income stream.

The Yield Spread Premium on mortgages ranges between one and two “negative points”. CitiChaseWellsAmerica will sell this loan on the secondary market, and pocket the premium, which will never be disclosed to you. The rate you will pay is spelled out in the Promissory Note. The effect of your points will be spelled out in the APR, or Annual Percentage Rate, which is disclosed on the Truth in Lending, or Reg Z disclosure. Other fees and costs are disclosed in the Good Faith Estimate. However, if they pay part of that premium to a mortgage broker, the mortgage broker discloses that payment on your Good Faith Estimate, banks do not. Going directly to CitiChaseWellsAmerica will not decrease this premium. Their Secondary Marketing department will negotiate the sale of your loan at the highest premium they can get.

This is not an even playing field, and the National Association of Mortgage Brokers has been lobbying hard for the last 10 years to require banks to disclose this premium too. According to NAMB, “The mortgage brokerage industry is regulated by 10 federal laws, 5 federal enforcement agencies, and over 45 state laws or licensing boards. Additionally, brokers typically have some type of Quality Control (QC) requirements and NAMB members also adhere to a strict Code of Ethics.” Loan Agents that work for banks or other direct lenders require no licensing, nor training, and have enormous turnover. In the meantime, look long and hard at these disclosure documents, take the three day recission period, and ask all of your trusted advisors to look over those papers.

Wise Advice on Neg Ams

2009-06-24T12:30:00.000-07:00

Negative amortization occurs only with monthly adjustables, called "Option ARM's" or "COFI ARM's" or "Choice ARMs" or “Pick-a-Pay”. With these products, you agree to pay a contractual rate, usually 1.5%, for a year, knowing that required principal and interest payment can go up by 7.5% each year thereafter. There is an underlying rate, though, and that is the rate at which your loan actually accrues interest. When you get the invoice, you have three choices: Pay all the interest and principal due, pay only your required payment, or pay only interest. The underlying rate is the sum of the index (let's say 1 yr US Treasuries, currently at 1.2%) and your margin (let's say 2.5%) - in this example, your mortgage is accruing interest at 3.75% (they round up to the nearest 1/8 of on percent). If you choose to make the contractual minimum 1.5% payment, the difference gets added to your principal, increasing the loan amount - causing the amortization to go "negative" because the principal is not going down, like a typical fixed rate loan would. It is an excellent product for folks who encounter temporary cash crunches, or investment properties with fluctuating rental income. It is not for those who lack financial discipline, however. Once the principal hits 115% of what you originally borrowed, the loan will be "recast", and you will have to either refinance or accept new terms at that time.

The New Reg Z - Same as the Old Reg Z

2009-06-18T17:04:00.000-07:00

As Congress prepares to enact new financial regulations, I suspect they will miss the central point – again. Adjustable rate loans and prepayment penalties are NOT the problem. The Federal Government’s refusal to update their antiquated Reg Z format has quite a bit to do with folks being misled as to the true nature of their mortgage. The “Truth In Lending” (TiL) document only takes the current index and adds the margin to calculate your APR (Annual Percentage Rate). No future increases or 10 year averages of these indices are taken into account by this “Truth” dispensing document. All adjustable rate mortgages are based upon an “index”. The two most popular are LIBOR (London InterBank Offered Rate is the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans. This rate is that which is charged by London banks, and is then published and used as the benchmark for banks rates all over the world.), and the MTA (This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated* by averaging the previous 12 monthly values of the 1-Year CMT) There are others, but these two will illustrate the illusion of “Truth” that Reg Z espouses to this day.

The One Year LIBOR rate is 1.70% today. The One Year MTA is 1.21% today. The bank adds a margin over these indexes to come up with your “fully indexed” rate. Think of it as a profit margin. For cars, this is the “dealer markup”, and you want it to be as low as possible. For banks, it represents the difference between what they pay to borrow, and what they will charge you to borrow money. For a prime borrower (someone with excellent credit scores), that margin is typically 2.50%. The riskier the loan (bad credit, bad collateral) the higher that margin is going to be.

So, today, those people whose loans are based on LIBOR will see their interest rates go to 4.20%. For those whose loans are based on MTA’s, they will be facing a new rate of 3.71%. Not too scary, is it?

However, and this is a BIG however, both LIBOR and MTA indexes are volatile. Just two years ago, in June of 2007, LIBOR was 5.4%, and the MTA was 5.00%. And they can and they have gone into the double digits. For instance, in March of 1989, LIBOR hit 10.56%, and the MTA has been as high as 15.00% (10/81). That’s why these loans have caps and floors – the cap (maximum rate) to protect the consumer, and the floor (minimum rate) to protect the banks.

Get a LIBOR loan today, and the APR will show a rate very close to 4.25%. Today’s plain vanilla, 30 year fixed rate mortgage costs (has a Note Rate) of 5.75%. The adjustable rate mortgage appears to be a better deal, based solely on the government sanctioned Truth In Lending disclosure! So, naturally, after being told over and over again to trust that APR, consumers picked the adjustables. But wait - the cap, typically 6% above the start rate, will be 10.25%. The TRUTH is, you could pay 10.25% someday, something the TiL cannot calculate, and will NEVER show you. The Promissory Note definitely makes it clear. Other disclosure documents will make it clear, but not the “Truth In Lending” document.

The fiduciary duty of mortgage brokers extends beyond these federal “protections”. We compete with un-licensed, un-trained, and generally ignorant loan agents. Finance journalists talk about the “Three B’s” of real estate lending. When applying for a home loan, you can go to a: Mortgage Broker or a Mortgage Banker or a Direct Lender (Bank). Only the Mortgage Broker needs to have a Broker’s License. The California Department of Real Estate takes fingerprints, and checks them against criminal databases, pursues consumer complaints, and can revoke that license. At the other two “B’s”, any loan originator can work there under a corporate license. And these Direct Lenders, like Ameriquest, or the subprime divisions of lenders like Countrywide would telemarket to people, and sell loans like used car salesmen. They never explained rate adjustment caps and lifetime caps or the difference between a hard and soft prepayment penalty - in most cases, the loan originator didn’t know it themselves.

A mortgage is not a car, and you can’t trade it in for a new model every couple of years. You have 72 hours to test drive a refinance (the rescission period) and ask trusted advisors if they think you are getting a good deal. If you stop paying a car loan, the car can be repossessed, but you will still have somewhere to live. The collateral pledged for a mortgage is real property, and everyone needs a trained professional to explain exactly what they are getting into. But I have seen people spend more time shopping for their new car, going from dealer to dealer, checking Blue Book prices, researching on the internet, etc., than they spend shopping for a mortgage. There’s a Lemon Law, and many other consumer protections in place for car buyers.

Regulation Z, implemented in 1988, will be changed this year. Prepayment penalties will be shortened, and the time frames for providing the Reg Z disclosure are tightened. The formulae – the means by which this much vaunted APR is calculated – remain the same, antiquated and inaccurate.

2009-06-08T15:36:00.000-07:00

Letter to the Editor, San Francisco Business Times, June 5, 2009

I agree wholeheartedly with Kenneth Sproul’s Guest Opinion (“Tap the great untaxed wealth transfer,” May 29-June 4 issue).

I have been a mortgage broker in San Francisco for many years, and remember asking then-Supervisor Carol Ruth Silver about means testing tenants before granting them rent control status. She seemed to think that was an invasion of privacy. I pointed out the Mortgage Credit Certificate program, as well as the Redevelopment Agency’s BMR (Below Market Rent) program, required applicants to submit tax returns.

San Francisco’s rent control constitutes a government taking, plain and simple. Subsidizing housing costs on the backs of housing providers is despicable. As the current Board of Supervisors continues to criminalize the act of providing housing, private citizens and companies will refuse to provide this much-sought-after commodity. Shall we pay our Housing Director $188,000 a year, only to find the FBI closing their offices to search for Section 8 fraud?

Section 8 recipients have to document their low-income status, and I am proud to have my tax dollars allocated to those who need government assistance. Not so with rent control, San Francisco-style. This city grants life estates to some lucky tenants, regardless of their income. It’s an arbitrary giveaway, lacking even a means test, and fails to help the less fortunate.

San Francisco needs to quit ignoring economic reality to kowtow to the self-perpetuating, tax-dollar-financed tenant activists, and cease extorting these subsidies from private citizens.

I believe passionately that this pig headed pounding on property rights undermines a compassionate agenda, where the truly needy are cast aside for the exigencies of the moment.

Catherine G. Tripp, San Francisco

TiL's - Lendings' Little Lies

2009-05-23T14:50:00.000-07:00

How “Truth In Lending” Lies to Consumers
The National Association of Mortgage Brokers has been lobbying Congress for 10 years to update the regulations referred to as the “Truth In Lending” laws, or “Reg Z”. Our pleas have fallen on deaf ears as more powerful lobbies than ours (Banking, for instance) saw no benefit to them to adopt a format of loan disclosure that was more honest. Before throwing blame around for the “subprime meltdown”, let’s look closely at what 20 years of inaction on the part of your elected representatives contributed to this credit crunch.

The much vaunted “Truth In Lending” or “Reg Z” documentation is hopelessly outdated. The dictated formula for calculating every mortgage’s Annualized Percentage Rate (APR) hasn’t changed for over 20 years. In real life, where Congress fears to tread, mortgage products that adjust have become steadily more numerous than fixed rate/fixed payment products. The APR as calculated by the Federal Government is grossly inaccurate for those consumers buying adjustable rate mortgages, it has been inaccurate for years, but like I said, the banking industry has their reasons for keeping this misleading formula in place.

First, a summary of what the APR is supposed to do: The Note Rate (the percentage printed on the Promissory Note) is just the beginning of what a mortgage can cost. Let’s say that rate is 6.00% on a plain vanilla, 30 year fixed rate mortgage. So, the APR begins with 30 years at 6%. Next, it adds in the origination fees that everybody has to pay (usually about a thousand dollars). Next, it adds in any points (prepaid interest expressed as a percent of the original loan amount – usually one point is paid). Then it takes all those up-front expenses and adds those dollars to the interest dollars over 30 years and comes up with an Annualized Percentage Rate. And that works pretty well for fixed rate fixed term fixed payment loans. You can compare the real cost of borrowing using the APRs of competing loans, unless of course, the Note Rate is subject to the whims of global borrowing rates.

Now cross the chasm of understanding to Adjustable Rate Mortgages (ARM). Here the APR takes the origination costs, and adds them to the interest that will be paid over the life of the loan using the “fully indexed” rate through maturity. The “fully indexed” rate takes the Bank’s cost of borrowing (the Index) and adds their profit margin (the Margin) to come up with what you, the borrower must pay.

The dirty little secret that the Federal Reserve (which administers Regulation Z) will not admit is that in its simplistic approach Reg Z assumes that the underlying index will not change. Avoiding prognostication is to leave the consumer unaware of dangers. Mandated automobile disclosures warn of impending death and the need for safety belts, but future rate increases (almost a certainty) are allowed to sneak up on unsuspecting borrowers. While the most popular indexes have been bottoming out in historical (all time) lows, the propaganda machine that convinced consumers to use the APR and only the APR to judge loan prices has chewed up the true cost of a loan and spit out the wrong impression. As LIBOR touched bottom at a little under 2%, adjustables based upon it looked lower than a fixed rate loan with no points. Even if the margin was a high 4% (typical margins are 2.25% to 2.75%), when added to a 2% LIBOR level, this unrealistically low “fully indexed” rate made the deal looked pretty darn good. The teaser start rate could be say, 5.5%, and the Reg Z would show our consumer that when it adjusted after two years, it would adjust to 4 + 2, or only 6%. The cruel reality is that LIBOR will probably never be that low again, and the caps, or lifetime possible highs on those loans were in the double digits, something the Truth in Lending document fails utterly to disclose. Customers who could have had a 6% fixed rate loan chose instead the “cheaper” adjustable rate loan, and now, when LIBOR is once again around 5%, they are wondering how they missed the boat.

What should you do? Tell your elected representatives to quit blaming the products and the sellers, and cast a shining light on their own failures to update consumer protections to reflect a more complex reality.

IRA - you can self direct

2009-05-20T12:05:00.000-07:00

Still keeping your 401k at your former employer? Are they taking good care of it? Probably not - go fetch it (rollover to new custodian) and put it in CD's - insured and guaranteed - starting to look pretty good these days. Start checking into it, I will write more later.

IRENA - encouraging new agency

2009-05-20T09:11:00.000-07:00

IRENA stands for International Renewable Energy Agency, which was set up this year to lead a global drive to accelerate and expand the development of renewable energy resources. Yay!
http://www.nytimes.com/2009/05/19/business/global/19renirena.html

Misinformation about “pick-a-pay” mortgages

2009-05-15T16:52:00.000-07:00

May 15, 2009, Floyd Norris, the chief financial correspondent of The New York Times wrote a column today dealing with the legacy of World Savings — now part of Wells Fargo — and its “pick-a-pay” mortgages. He says that it appears that many “homeowners” will be able to keep making minimum payments — and keep running up the amount they owe — for years to come. But there is little chance those owners will eventually be able or willing to pay the principal, which is likely to be far in excess of the value of the house, creating a delayed foreclosure crisis that could create problems for neighborhoods, as well as for Wells Fargo.
Here is the comment I sent in:
I disagree with the premise that adjustable rate loans are dangerous. Right now, people with adjustables are paying less interest than most folks with fixed rates. Typical indeces (Treasury, COFI, etc.,) continue to go DOWN every month. Right now, my monthly adjuster’s minimum payment is forced to include principal, because the interest rate is only 4.125%, and at annual re-set, it was 6.625%. Mortgage loan servicing portfolios churn every 5-7 years because at least 80% of borrowers move or refinance. Rightly noted was World’s industry beating low foreclosure rate. Wachovia tried to blame their poor underwriting on World, and now Wells is using them as a scapegoat, too. Risky loans - to both consumers and banks are easily spotted - lousy credit history, less than 20% equity at time of origination - that’s about it. Fannie Mae studies determined only one statistically relevant indicator of default potential - FICO scores.

Monetary Musical Chairs

2009-05-12T17:22:00.000-07:00

So, how are you faring in this economic crisis - how is your stress level? It's like everyone was playing that old children's game of musical chairs, and last year the music stopped. Only when the history-challenged grownups played, they assumed there would be plenty of chairs, and when the music stopped, found themselves flat on their butts. I am lucky enough to be sitting, but the music has not started back up, and the chairs are pretty wobbly...

FDIC mystified by Risk Based Pricing

2009-05-11T12:11:00.000-07:00

Stupid FDIC - charging insurance based solely on the size of a banks' deposits. That's like car insurance based not on the likelihood a particular driver will have an (other) accident, but on the size of the car they drive. Savings and Loans who hold many dollars on deposit, then loan carefully to good borrowers get punished for their caution, while those who loaned their thin deposits to snail farms and deadbeat dilberts pay considerably lower premiums. Sure, setting premium levels on a number so easily found in the balance sheet is simple, but it's stupid. Always has been, and is partially to blame for the current meltdown. Premiums should be based upon relative risk of the insured - keeps payouts down, reserves up. To change this, legislators would have to have some experience in running a business, not campaigning for another six years eating their meals at the public trough.

Congress' Part in the Meltdown

2009-02-03T10:53:00.000-08:00

The Real Villains - How dare Congress pat themselves on the back for spending billions of our hard earned dollars? The same back that was turned away from SEC's lackadaisacal prosecutions? The same back that was turned away from updating consumer disclosures? The same back that was turned away from Standard & Poor's and Moody's when they self dealt? While engaging in a full frontal assault on steroids and frontal nudity in football. Eye off the ball, you guys, never mind the cheerleaders, start throwing penalty flags before the play clock stops. Oh wait, nobody has to pay any penalties ever, we will just charge more for the tickets.