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.

Thursday, May 22, 2008

Punny Poll #32: Who Owns the Moon?

Author: Nick
Category: Money
Topics: ,

comic 28 - moon ownership

The results of the previous Punny Poll confirmed what I already suspected: we’re screwed. When asked if they’re worried about paying for their children’s college tuition, 35% of respondents said they’d be sending their kids to clown college. Another 22% have their eyes on state college, which isn’t such a bad thing. I mean, I’m a product of a public university and I can count all the way up to 450! About 10% of poll-takers weren’t worried and said they could afford to pay tuition bills, and another 14% said scholarships and loans would cover their children.

Popular Mechanics, a technology magazine which has since been replaced by the internet, featured an interesting article recently about ownership of the Moon. It talks about the Outer Space Treaty of 1967 which says that no nation can claim the Moon or occupy it as we did, say, with America a few hundred years ago. (That didn’t stop the U.S. from sticking a flag on it in 1969.) The treaty does not, however, address personal or corporate ownership of the Moon. Not too long ago, a guy named Dennis Hope started selling chunks of land on the Moon for about $20 each. National sovereignty and real estate law aside, there’s also the practical consideration that you can’t really own property unless you’re around to defend it, and except for the secret Russian laser cannon on the far side of the Moon, nobody’s really in a position to secure it.

What the articles doesn’t discuss is the 2008 Punny Money Moon Treaty which says that ownership of the Moon goes to whichever answer in the following poll gets the most responses:
[Read more...]

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 FatWallet.com 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, December 6, 2007

The Straw That Broke My Camel’s Back: Rate Locks For Stupid Mortgage Borrowers

Author: Nick
Category: Money
Topics: , ,

idiot-saving man to the rescue!

It takes a lot to make me really angry. Sure, I’ll get a little scary when I’m wronged by a retailer, and I’ll occasionally issue the one-finger salute to idiot drivers, but I haven’t been this infuriated in a long time.

And why am I pissed as a porcupine in a pig pen? It’s because of President Bush’s new plan to freeze the interest rates of dumbasses with adjustable-rate mortgages. Great, now I’m swearing. See what you made me do, Mr. Prez?

In case you haven’t heard the news yet, here’s the gist of this ridiculous bailout.

  • It rewards the stupid. If you were idiotic enough to come into a mortgage loan in the last few years that will soon (but not before the new year starts) adjust to a rate 30% or more above your current rate, you may be eligible to have that rate locked. Bye-bye rate jump.
  • It’s not for everyone. You have to be current on your mortgage payments to qualify for the rate freeze. In theory, those behind in their payments now could use this plan the most. Nope, they’re still screwed.
  • Some investors will get screwed too. Investors who bought these adjustable-rate mortgages from banks expecting to cash in on higher interest returns may get shafted. While the program is designed to benefit only those who would have trouble making payments if their rate adjusted (a good thing for investors who would otherwise lose money on defaulted loans), it will undoubtedly help out some people who can make their payments just fine in real life. That means investors will get lower returns on their mortgage loans, and that could discourage them from putting their money into lenders’ hands in the future. That means higher mortgage rates for everyone down the road. Yay!
  • It’s temporary. The rate freezes will only last for five years, which means we’ll have a repeat of the current mortgage crisis again around 2013. And with higher rates because fewer investors will want to fund these mortgages, these adjustable rates could then jump far higher than they would if they simply started adjusting now. In short, this plan postpones the bad but makes things worse later.
  • As for smart homeowners? If you’re like me and had the three brain cells necessary to see that a fixed-rate loan was a good idea… well, you get nothing. Actually, you get to continue paying a higher fixed rate, while people who took out riskier loans are rewarded for their foolishness with longer terms on their lower rates.

I would have been even more pissed if FDIC Chair-dumbass Sheila Bair had her way. She wanted to freeze rates on all subprime loans. Forgive me for purchasing a home I can actually afford, Ms. Bair, but I didn’t know you were planning to protect financial morons from the reality of their bad decisions.

I’ve heard all the arguments for why this is a good idea. People often blame predatory banks for forcing these horrible mortgages on poor unsuspecting homebuyers. (This is bull hockey. People who can’t do interest rate math shouldn’t be given six-figure loans in the first place.) Others won’t blame either side, but they point to economic doom should all these adjustable-rate mortgages end up in default. But regardless of who is to blame and what could happen, I hope you’ll agree with me that, in the end, this is a terrible idea. It’s demonstrating to people that the government will always bail them out of their financial messes, and that just encourages even more reckless behavior.

As I mentioned above, I was awesome enough to see that the 4.9% interest rate I was offered on an ARM mortgage could adjust as high as 9.5%, whereas the 6 percent interest rate on a 30-year fixed mortgage would remain at—surprise!—6 percent. What does that get me now under this government handout plan? Zero. Zip. Zork. Not. A. Thing.

Really, President Bush, how could you agree to this plan? You were so against government assistance in the subprime mortgage meltdown. I… I could stand by you when you started crazy wars and conducted slightly unconstitutional domestic surveillance. But I just can’t forgive this! You are so not getting my vote for re-election when you alter the constitution to allow dictator rule, I promise you that.

I’d like to take this time to address my mortgage lender.

Dear Bank of America,

Thank you again for agreeing to give me a whole lot of money to buy a really overpriced home a couple of years ago. Also, thank you for giving me an ethical mortgage officer who easily convinced me to go the fixed-rate path since it meant that I would not lose my home in a few years when faced with payments I cannot afford.

I hear you may soon be planning to lock in the rates of some of your less intelligent mortgage customers who thought an initial rate of under 5% that could adjust into the double digits was a smart idea. I’d like to remind you that I’ve been a loyal customer of yours for some time now; I’ve made every payment on time, and I even put a smiley face on the memo line of my mortgage payment checks. That said, I must ask you to give me the same handout as your less intelligent mortgage holders. If you decide to lock in any of their lower rates, I request that you reduce my rate to those same levels. In addition, I would ask that you refund me the difference in interest I would have paid had I instead opted for that lower-rate ARM.

If you are not prepared to offer me the same treatment as your lower-IQ’d borrowers, I will gladly sue you to get my rate lowered. Of course, we know that won’t accomplish anything because you will likely get a free pass from the federal government’s Offices of Thrift Supervision and the Comptroller of the Currency. So in the end, you get more of my money, you help stupid people not go bankrupt, and you get to continue being a giant ATM to math retards. I guess everyone’s happy! Oh wait, I’m not.

Respectfully asking you to suck it,
Nick

Phew! It sure feels good to vent, but I’m sorry I had to expose you guys to that. Don’t worry, I’ll return next time with tips for saving money on lollipops and rainbows.