Thursday, June 12, 2008

Upside Down on Your Mortgage? Buy A New House For Cheap, Then Default On the Old One!

Author: Nick
Category: Money
Topics: ,

comic 35 - foreclosure

The current housing/mortgage/credit/energy/everything crisis is inspiring people to find creative solutions to overcoming their financial problems. The latest get unpoor quick scheme: swapping houses with negative equity for much cheaper ones. Even folks who are $100k or more underwater on their current mortgages can escape their crushing debt and still come out as homeowners. It’s so easy, even you can do it by following these simple steps:

  1. Sign a contract on a new house for cheap.
  2. Forge a rental agreement for your current house and use the “rental income” to help you get a mortgage for the new house.
  3. Move in to the new, reasonably-priced house.
  4. Default on the old mortgage and let the bank foreclose.

Some banks and government agencies are calling this “buy and bail” tactic fraud, usually pointing to step two which requires you to put your current house down as rental income. But since many mortgage lenders let you buy a new home before you sell the old one without a rental agreement in place (just the motivation to sell quickly so you’re not paying two mortgages), you may be able to bypass the fraud part of the scheme entirely. Those who’ve pulled it off successfully say there’s nothing fraudulent about it, possibly because it uses the banks’ own policies against them.

Because buy-and-bail is happening more and more frequently, government-sponsored underwriters like Fannie Mae are moving quickly to help clamp down on the practice. And even without new rules and regulations, buy-and-bail is still a tricky endeavor with plenty of drawbacks, such as:

  • Your credit will suffer greatly. Since foreclosures latch themselves to your credit report for seven years, you really better like that new house because you won’t be getting another mortgage loan for a good long time.
  • You might go to jail or get sued. If your old lender finds out that you drew up a fraudulent rental agreement to get the new mortgage, they might come after you with their army of lawyers. Even if you don’t use the fake rental agreement, jilted lenders may still come after your assets including your new home.
  • It’s morally wrong. Forget rules and laws and everything else. If you pull off a buy-and-bail, you’ll be just as sleazy as the bank that sold you a mortgage you couldn’t afford in the first place.
  • Banks can just say no. If a lender suspects something like a buy-and-bail situation, they might turn your down. But if you’re going for a mortgage with someone other than your current lender, there’s really no reason for the new lender to say no even if they suspect buy-and-bail since only the old lender will have to deal with the resulting foreclosure.

A few banks have wised up to the buy-and-bail scheme and are now requiring people who buy a new home before selling the old to prove they can pay the mortgage on both of them. Of course, even if you can pay both mortgages doesn’t mean you’re going to.

Personally, if you’re that far under on your current mortgage and you want to sell, I think your first attempt should be at making a short sale—selling the house for less than the balance of your mortgage—with your lender’s blessing. You get to avoid any legal tangles, the bank doesn’t lose as much money as it would on a foreclosure, and the house goes to a real person instead of a bank. Of course, if your bank won’t help you out with a short sale, you may be slightly more morally justified in buying and bailing on them.

Tuesday, April 15, 2008

Interest Rates on ARM Mortgages Are Adjusting… Lower???

Author: Nick
Category: Money
Topics: ,

comic 13 - adjustable rate

In its continuing efforts to convince me to move to Canada, the U.S. economy has decided to further “reward” my decision to avoid risky adjustable-rate mortgages (ARMs) by throwing me this infuriating bit of news: some ARM rates are adjusting down.

Yes, some people are still getting priced out of their homes by their resetting mortgage rates that cause their monthly payments to skyrocket by hundreds or even thousands of dollars, but some lucky fools are now paying less today than they were two or three years ago. How can this be? Well, it all depends on what benchmark a mortgage lender follows when initially setting and later adjusting an ARM’s rate.

For example, consider the case of some bank that, for the sake of protecting the stupid, we’ll simply refer to as XYZ Bank. XYZ Bank has offered numerous adjustable-rate home mortgage loans dating back to 2003. Its most common product is the 5-year ARM—borrowers pay at a fixed interest rate for the first five years, after which the rate adjusts annually but no more than 1% at a time. XYZ Bank also offers 3-year and 1-year ARMs which, as you can surmise from their names, offer fixed rates only for the first three years or one year, respectively. At the time the mortgage loan is issued, and then annually after the fixed-rate period ends, XYZ Bank sets the mortgage’s interest rate based on the 1-year LIBOR rate. (In case you don’t know what the LIBOR is, it’s just an imaginary number established by magical banking elves from the mythical land of England.) The interest rate isn’t exactly the LIBOR rate; XYZ Bank tacks on a few extra percent for profit. The important thing to understand is that XYZ Bank’s ARM rates follow the 1-year LIBOR up or down.

Here comes the fun part. Customer A got a 5-year ARM through XYZ Bank back in March of 2003 when the 1-year LIBOR rate was just 1.34%. Customer B got a 3-year ARM through XYZ Bank in March of 2005 when the 1-year LIBOR rate was 3.84%. As a result, Customer B’s initial fixed rate was likely a couple percent higher than Customer A’s. Fast forward to March of 2008 when both Customer A and B’s fixed-rate periods end and their interest rates adjust by as much as 1% annually based on where the 1-year LIBOR rate is now. In March 2008, the 1-year LIBOR rate was 2.709%. That’s more than one percent higher than Customer A’s initial LIBOR rate and more than one percent lower than Customer B’s initial LIBOR rate.

one year libor index graph

So what happens? To make a long story short, XYZ Bank adjusts Customer A’s rate up by as much as 1% and lowers Customer B’s rate as much as 1%. As a result, Customer A’s monthly mortgage payment skyrockets $500 a month; he can’t afford it, and nobody will buy the house for anywhere near what he paid for it in 2003, so the bank forecloses by the end of Summer 2008. Customer B ends up saving $400 a month and buys Customer A’s house at a foreclosure auction for half of what Customer A paid for it in 2003. Customer A finds out and sleeps with Customer B’s really hot wife for revenge. Customer B and Mrs. Customer B end up getting divorced; she takes Customer A’s original house in the divorce agreement and moves in with her man-mistress (Customer A). Then the LIBOR rate jumps 5% and everyone loses their homes anyway. The end.

And just to prove I’m not making all of this up, here’s a link to a story over at of a guy whose 3-year ARM just made its first adjustment—down 1% from the initial rate.

As for me, I still have my lovely 6% fixed-forever loan that seems like a really bad idea today but I’ll probably be happy I took in a few years once those ARM rates start shooting up through the stratosphere. Unless, of course, the imaginary English elves have anything to say about it.

Monday, March 17, 2008

Get Your Bank to Drop Your Mortgage Interest Rate In Three Easy Steps

Author: Nick
Category: Money
Topics: ,

1 - you must be at least this stupid to ride this government bailout

So you’re sitting in your home that you purchased sometime in the last few years, reading news of economic woes and various proposed bail-out plans for stupid homebuyers who bit off more than they could chew in the housing market, and you’re thinking, “Man, why couldn’t I have been stupid with my money too!”

I’ve been thinking that a lot lately myself. Sure, I can afford my mortgage payment, I have a hefty emergency fund and growing retirement savings, and things look pretty nice. But you know what? If my fixed-rate loan were at 5% instead of the 6% I’m paying now, I’d have a good bit of extra money each month I could devote to my ceramic rooster collection. The trouble is:

  • I pay all of my bills, including my mortgage, on time and in full every month.
  • My credit rating is awesome. Seriously, I can make women faint just by telling them my credit score. Some men too.
  • No bank in their right mind is just going to give me a free interest rate drop just because I want it, especially since it looks like I’ll have no problem paying my mortgage forever.

Sure, I could refinance, but rates are not yet (and probably won’t be) at the point where I’d break even unless I were committed to staying in my current residence for a decade or so, which I’m not.

There are other ways I could convince my bank to drop my interest rate. For example, I could stop paying my mortgage for a couple of months. Then I bet I’d get a call from my lender asking if there’s anything they could do to help encourage me to start sending them thousands of dollars again. “Of course! Just drop my interest rate by 1% so I can afford my payments again.” And depending on how desperate my lender would be to keep my mortgage checks coming in, they might just agree. Think it’s not possible? There has been more than one instance of people getting free interest rate drops for doing just that.

Of course, if I stopped paying my mortgage for 60 or 90 days, I risk plunging my creditworthiness into an unforgiving abyss, and there’s no guarantee the bank would even agree to drop my rate. Still, wouldn’t it be worth a 200-point credit score drop for a few years to save myself $250 or more each month for as long as I owned my home? Some might say yes, and if this scheme were a sure thing, I’d gladly trade score for cash.

But is there another way to frighten your lender into giving you a break on your interest rate? What if you made them think you were going to stop paying your mortgage without actually doing it? I guess you could simply call up your bank and say, “Drop my interest rate or I’ll stop paying next month” to which your bank would likely reply “To reach someone who thinks you actually have the balls to do that, press 1. Otherwise, stay on the line while our call center employees laugh at you while you’re on hold.”

Someone who has a strong credit history saying that they’re willing to throw it all away probably won’t scare a bank into a free rate drop. But what if you gave the bank some evidence that you might really stop your payments? Say, for example, you loaded up on credit cards, maxed them out as much as you could, and then went to your lender asking for help. If your bank sees that you’re charging a bunch of credit cards left and right, they might be more willing to buy into your threats of defaulting on your mortgage.

So, for those of you out there with entirely too much courage, a credit score you don’t mind trashing for a few months, and a mortgage lender with real people who might be willing to listen to you, here’s how to command a mortgage rate drop in three simple steps:

  1. Go after every bit of credit you can. We’ve talked briefly about credit card app-o-ramas on here before, but what you want to do is apply for pretty much every darn credit card in existence. If you can rack up around $250,000 in new credit, you’re probably in good shape going into step two.
  2. For added effect, use as much of that credit as possible. If I were a bank and I saw you with $250,000 of new credit lines in one month, I’d be pretty scared that you’re about to make a financial mess of yourself. But if you really wanna make your lender poop its pants, you could try spending that quarter-million dollars. Obviously you don’t want to buy anything you can’t return for a full refund later. Your best bet may be hitting some electronics superstores and loading up on a few hundred 50″ televisions. But for the love of all that is holy, study their return policies like it’s your final exam in astrophysics and don’t open the boxes.
  3. Go to your lender and beg for help. Make an appointment with someone at your bank (the one that holds your mortgage loan). You should experience a conversation that goes something like this:

    You: Hi, I can’t afford my mortgage payment anymore. Can you drop my interest rate a point or two?
    Bank Person: (Typing.) Well let’s just take a look at your credit report here and HOLY RAVIOLI YOU’RE ABOUT TO DECLARE SUPER-BANKRUPTCY WHICH IS 500 TIMES WORSE THAN REGULAR BANKRUPTCY!!!
    You: Yeah, can you help me out with that?

    Your maxed-out, multi-hundred-thousand-dollar credit lines should be enough to convince your lender that you are indeed in some sort of financial trouble. But it’s up to your lender to decide if they want to help you and themselves avoid a foreclosure situation which could cost the bank tens of thousands of dollars.

Whatever the outcome, be sure to return everything you bought in step two and pay off your credit cards in full. It may take a few months, but your credit rating should stabilize once your balances return to zero. Any credit hits from all those inquiries when you opened your new credit lines should be partially or completely offset by your massive new total available credit line.

While most of the actions above should only have temporary effects on your credit score, I cannot put enough disclaimers on all of this because any number of things could go wrong. At the very least, you could piss off your bank and they’ll leave a nasty note in your mortgage account’s record saying “Does not play well with others.” Or your credit card issuers might see your massive credit grab as a sign of financial struggle (which is the illusion you’re trying to create, right?) and decide to close down some or all of your accounts. Or you could screw up the whole buy-and-return process and end up with 250 HDTVs that are yours to keep and pay for. So proceed with this plan at your own risk and only if you think you have the discipline to carry out the plan in its entirety… or at least up to the point where you can send me a funny e-mail that starts “So the bank foreclosed on my house today thanks to you….”

Thursday, August 30, 2007

Search and Ye Shall Receive: Payday Loan Jail, Property Tax Liens, and Teenage Daughters

Author: Nick
Category: Money
Topics: , , , ,

Search and Ye Shall Receive returns with more answers to questions people have recently asked search engines that brought them to Punny Money.

Jail for Unpaid Payday Loans?

payday lenders leave you out to dry but not in jail

Can I be sent to jail for not having money for payday loan? (via Google)

This person might want to consult with a real lawyer and check his or her state and local laws, but I’ll still share my view on this. I previously stated that you could go to jail for lying on a credit card application (e.g. stating you make $250,000 a year when you really make $6.50 an hour). In theory, the same could be true for payday loan applications. That said, payday lenders typically don’t collect the sort of information you would normally lie about, so the chances of incriminating yourself over a payday loan are very slim. If you’re worried about payday lenders getting you arrested for not paying your loan, you can relax. It’s illegal for payday lenders to threaten you with jail over unpaid loans. Just be sure not to write any bad checks when paying back the loan; they can still land you in legal trouble.

Do Delinquent Property Taxes Mean No Income Tax Refund?

your tax return is likely safer than your property

If you owe back property taxes, will you not get a tax refund? (via Ask)

Your Federal income tax refund is likely safe because property taxes are collected by state governments. Your state income tax refund is also probably safe, but that’s because the state has a much easier way to collect property taxes in arrears: tax lien sales. Normally once a year, counties or states will “sell” the rights to collect unpaid property taxes on a property to whomever wants to buy them. The buyer then jumps to the head of the line on most liens placed on the property (like mortgages and judgments, but not other state tax liens). When you go to sell the property, you’ll have to cough up the money to pay off those liens.

There are also tax deed sales in which your property is sold out from under you to pay off your delinquent taxes. Obviously this is far worse than just having a lien placed on your property.

So the answer to this question is no, your tax refunds will likely not be affected; but you might want to hold on to those refunds to pay for an apartment if your property goes to a tax deed sale.

How to Talk to Your Teenage Daughter?

aaaah, floating lips, nooooooooooo

How do you talk to a teenage daughter? (via Google)

Good question. When I’m talking to your teenage daughter, I usually ask these questions first:

  1. Are your parents home?
  2. You are 18, right?

Oh, you probably wanted advice on talking to your own teenage daughter. Uh, good luck with that.

Thursday, August 2, 2007

Mayday to Payday: Why One Woman Loves–Or At Least Kind of Sometimes Likes–Payday Loans

Author: Nick
Category: Money

this way to 800 percent interest

Photo by Stephen Witherden

By Valerie March

Okay, okay–I get it. Payday loans (or cash advance loans) are bad news.

The short-term advances are horrendously expensive. They take advantage of young, poor and undereducated people. They often trap users in an endless cycle of debt by allowing people to borrow money they can’t pay back, thus “flipping” the loan for ever-increasing interest rates, sometimes as much as 800%. They cause much suffering and despair. Payday loans kill pretty flowers and hurt innocent kittens.

Roger that. I concede. I’m waving the white flag.

But hear me out–when you’re desperate, payday loans can provide a relatively attractive alternative by heading off even worse financial woes, especially if you enter with your eyes wide open.

As a semi-professional financial screw-up, I’ve never been particularly vigilant about balancing a checkbook or keeping receipts–I figure my cooking skills, sparkling personality, and kick-ass karaoke version of “Hit Me With Your Best Shot” more than make up for this character flaw.

But, a little more recently than I’d like to admit, I realized I had written a $200 outstanding check with only $100 in my checking account. Savings? Ha. Good one. I also had no credit left on any of my cards for a cash advance, and payday (as well as the nearest plasma bank) seemed a million miles away.

I had four choices:

  1. Let the check bounce and assume the risk of it being returned, only to rack up fees, credit damage and embarrassment.
  2. Let the check bounce and pray that my bank would cover it anyway, which means I would incur the $35 fee that my bank assesses and an icky mark on my credit.
  3. Auction off my kidney. Probably the left one.
  4. Or I could discretely and easily… take out a payday loan.

I can hear your horrified gasps. Everybody just calm down. Let’s look at this rationally.

pennies from heaven, or maybe a payday lenderA short-term loan would cost me a mere $21 for the $100 I needed to borrow, and it would make its way into my account the next day, thus saving me the credit blemish. (Note: The fees vary for each loan provider and depend on your personal financial status. Be sure to shop around for the lowest rate and don’t hesitate to tell competitors about lower offers to see if they can at least match or beat them.)

See what I’m saying here? Yes–I should have kept a better eye on my balance, I should have kept my credit lines in check, and I should have had savings.

cash goat says: payday loans are baaadBut I didn’t, so when the cash cow runs dry, problem-solving people like me turn to the cash sheep or cash goat (I’ve even been so low before as to look to the cash hamster).

Now, make no mistake: I am not advocating cash advances as a way to live. Routinely getting payday loans is a bad, bad idea… but, when used strategically, they can be a powerful weapon in any financially irresponsible person’s arsenal.

Until I reach the point of fiscal righteousness, I vow to make even the bad decisions in a best possible way and save my kidney for when I really need it–like when the Fender FR-50CE Resonator Sunburst goes on sale.

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By day, Valerie March is an assistant editor at a financial publisher that offers investing advisory services. (Yep. Not kidding.) By night, she is an aspiring singer/songwriter. Valerie has been saving, rather unsuccessfully, to buy a new guitar for a long, long time. You can check out her and her music out at