Posts tagged Real Estate and Housing
Low Interest Rates Do Not Make Homes Affordable
Aug 4th
Does the sales price of your home matter if the mortgage rate is low enough?
If you ever thought about buying a home, the recent all-time low mortgage rates must be enticing. And this is exactly how the government wants everybody to feel, by the way. In an effort to keep homes affordable (as they claim), the federal reserve is driving down interest rates to record lows. But is what they are doing helping? Let’s take a look.
Just a short couple of years ago, interest rates were at 6 percent. For a $300,000 mortgage, the payment would have been $1798.65 a month. With the interest rate at 4.5 percent, the monthly payment drops to $1520.06. So far so good, because it costs us less to own our home.
But wait a minute.
Most people don’t just refinance and lower their payment. These days, with rates at 4.5 percent, roughly the same monthly payment ($1798.73, to be exact) could get you a $355,000 mortgage. So what do people do? Instead of buying a $350,000 home with their down payment and loan approval letter, they shop for a $400,000 home. And who can blame them? An extra $50,000 almost always gets them a nicer place. Sometimes, it would actually allow them to pay more for a house than they otherwise would.
For example, they might have been able to get the house for $350,000 if they tell the seller that the offer is all they are approved for, but if a buyer can muster up $400,000, he might end up offering $360,000. Same house, higher transaction price. Having a lower interest rate also allows more people to qualify for a home. This is a good thing for someone who couldn’t afford the payment before, but it drives prices higher because of more demand, ultimately lowering affordability for everybody.
In other words, lowering interest rates gets more people thinking about buying a home and drives up demand. Most of the time, that’s a noble and worthwhile goal, since home ownership is still a dream of many. But as you’ve witnessed in the last decade, allowing more people to own homes mindlessly is just reckless. What we really need to do is make homes affordable so financially responsible people can actually afford the payments, which is only achievable through lower home prices.
I’m a homeowner too, so the selfish side of me is thinking that high-priced homes are good. But for the economy to grow and our country to be a place people want to be in the future, nice homes need to be affordable without government intervention. Unaffordable home prices will never get us there. Please allow homes to be affordable again for the hard-working American.
Related articles from MoneyNing:
Best Money Tips: Escaping the Mundane
Aug 2nd
Welcome to Wise Bread’s Best Money Tips roundup. Today, we tell you how watching movies can increase your money IQ, why the rich are leaving their mansions, and how to get stuff done after a tiring day at work!
Top 5 Articles
7 Best Movies for Learning About Personal Finance – You don’t have to read through a boring book on “money management” to get all the life lessons for handling cash. These movies can also help! Money Crashers
Are the Rich Walking Away from Million Dollar Mortgages? What’s up with all the celebrities losing their mega-mansions? This piece helps put it into perspective. Watson Inc.
Exhausted After Work – You know the scenario: You return home from work completely wiped out and there are more chores to be done! How do you overcome fatigue to get your household jobs tackled? This is encouraging reading. Unclutterer
5 Common Happiness Mistakes (Boosters) that Actually Do More Harm than Good – Are you using any of these as a crutch? You might want to stop it. The Happiness Project
13 Tips for Enjoying Poker – The history of Wise Bread embedded in the joys of poker. For those of you who don’t actually like it, however, these tips are for you! The Art of Manliness
Other Essential Reading
Escaping the Mundane – Doing the same things over and over (especially in regards to defeating debt) can drain the life out of your life. Don’t fall prey to the thought that frugality somehow equals deprivation. This article is an inspiration! The Simple Dollar
Save Money on Shipping With Free Boxes from USPS – While UPS and FedEx will also give you free boxes (assuming you use their services), most people are more likely to use USPS for their shipping needs. Don’t ever pay for boxes again! Get Rich Slowly
Treat Your Job as If You’ve Won the Lottery – With unemployment high, and opportunities in many areas low, consider how lucky you are to be employed! Financial Samurai
6 Ways to Make Your Flip Videos Rock – There’s more to great video than just whipping out the Flip and expecting magic to happen. Get professional tips for better videos now! My Life Scoop
Welcome to the Real World – With heavy reference to The Matrix, this re-release of an older blog post offers some hard truth about money. Brip Blap
6 Great Reasons for Paying off the Mortgage on Your Home
Jul 29th
Should you pay off the mortgage on the home you are living in? Mortgage interest rates are at historic lows and a fixed rate mortgage seems to be a deal of a lifetime right now, so why would anyone pay it off? Here are six reasons why paying off your mortgage is still worthwhile in the current economic climate.
A Mortgage Is a Cost
Even with a tax deduction, the interest you pay on a mortgage is still a cost. I don’t think it makes sense to continue to sending the banks interest just so that the government returns a little portion of it back to you. It is really only a great deal for the bank if you keep your mortgage for its full term.
Cash Flow
One reason many people do not pay off their mortgage is that the extra money you put into your house isn’t as liquid as cash sitting in an account. However, once the mortgage is completely paid off, you will free up the amount of money you used to send to the bank. That money can be saved or spent on other things as you wish.
High Investment Returns Are Rarely Guaranteed
I know that many folks would argue that today’s low interest rate mortgages mean that you can use the money to invest and earn a yield higher than the mortgage. However, it is fairly impossible to find a guaranteed investment that pays more than the average mortgage rate right now. Money markets are yielding near 0%, and the stock market is quite volatile and has long periods of stagnant or negative return as we have seen in the past decade. Basically, there is no guarantee that you will beat your mortgage rate with your investments.
Security Against Income Loss
If you have a paid off home, then you are much better insulated against income or job loss because you do not have that liability every month. Many people take 30 year mortgages these days, but how many people actually have a job guarantee for 30 years? My guess is that most of us will go through a period of reduced income in three decades. The sad thing is that if the mortgage isn’t paid off then the bank could take back the home after three or four missed payments even if the homeowner has been paying on time for years.
Home Equity Is Accessible
One argument against paying off the mortgage is that money put into a home is illiquid. This is true to an extent. There are ways to release the home equity as long as you have equity in the home. Home equity lines of credit are relatively cheap compared to credit cards, and seniors can opt to take a reverse mortgage. It usually costs some money to release the equity in your home, but it is possible to still live in the home if you really needed to tap your home equity. For some people, the fact that home equity is less liquid is actually a good thing because they would be less likely to spend it. I think of home equity as an emergency fund, and it should only be tapped when absolutely necessary.
Debt Is Bad During Deflation
Although mortgage rates are near historic lows right now, I think that deflation is a possibility in the near term. In the face of deflation any type of debt is getting greater in real terms. Basically, your wages will probably decrease in the current economy while your debt is just as large or grows even larger. It is better to retire the mortgage or be a renter in the face of deflation.
Although I completely understand that it is possible to keep a mortgage on your home and then make a profit on investing, I feel that it is a gamble on your residence. The stock market has had long terms of zero or negative growth so unless you have a guaranteed investment that pays more than your mortgage rate, then it is probably best to retire that debt once and for all. Once you are free from a mortgage you will actually be a homeowner, and no longer a homedebtor.
FSBO: How to Sell Your Home on Your Own
Jul 27th
For Sale By Owner, also known as FSBO, has become very popular in recent years. Selling your own home doesn’t have to be the death trap many real estate agents would have you believe, but you DO have to be willing to do the legwork yourself.
Your most important goal in a FSBO sale needs to be to reach potential buyers. If you think of everything you do to sell your home in that light, you will be much more likely to succeed. That being said, here are the basics you need to accomplish in order to sell your own home.
Prepare Your Home for Sale
Before you can even think of selling your home, you need to get it looking as good as possible. This means:
- Making all necessary repairs
- Cleaning your house from top to bottom, inside and out
- Staging your home to make it look like a model home
Now, doing repairs doesn’t mean you need to do a complete remodel. In fact, in most cases it is recommended that you don’t, as the improvements usually don’t generate that big of an increase in the final selling price. However, a new coat of paint, steam-cleaning the carpets, and fixing that pesky dripping faucet all add to how well your home appeals to potential buyers.
Properly staging your home is also very important. Be sure to get rid of all the unnecessary knick knacks and furniture. Rent a storage unit, and pare down your furniture and belongings to the necessities. Think of how a model home looks — idealized, without the everyday clutter of real life. That's what potential buyers want to see!
Plan Your Marketing Strategy
Proper marketing is perhaps the most important part of selling your own home. If potential buyers don’t know your home is available, it won’t sell. It’s as simple as that. Furthermore, the more buyers see your listing, the greater your chances of selling, so it is imperative that you market your home via as many channels as possible.
1. Get an MLS listing number. This is the first and most important thing to do, as it will enable buyers to find your home via conventional methods, such as Realtor.com.
2. Hire a photographer or take professional-looking pictures. The majority of people start looking for homes online, so good photography is the second most important part of a good marketing strategy. Take pictures of all the rooms and include several 360-degree spins. Pictures should be taken when your home is clean and staged, and in bright lighting — blinds open and all the lights on. Avoid anything "ugly" in the pictures (no trash cans, open toilets, or streets or sidewalks in the exterior shots) and pretty things up with some flower arrangements. Remember, buyers are looking for their dream house, so make your home look as idyllic as possible!
3. Write a solid listing. A poorly written listing is a red flag to potential buyers that you don’t know what you’re doing. If you’re not sure how to write a good listing, browse through some agents’ listings to get an idea of how it’s done.
4. Put up signs. Some HOAs do prohibit everything except window signs, but always put a sign in the yard if you can — two signs if yours is a corner lot — with your phone number so that potential buyers can call and set up a showing. Also be sure to design an attractive flyer, with several pictures, the price, and a bulleted list of the home's best features, and put the flyers in a plastic tube affixed to your sign.
5. Advertise. You are saving a lot of money by not paying an agent 6 percent, so be sure to put some of that money into decent advertising! Run your ads in all the major and neighborhood papers in your area, as well as on websites such as Craigslist.
6. Use direct mail. Small, colorful postcards aren’t expensive to make or mail, and are an attractive way to showcase your home to potential buyers. Plus, if the recipients you mail to aren’t interested, they might know someone who would be. A postcard can easily be stuck on the fridge or given to a friend.
7. Start a website. One of the biggest cons of not using an agent is not having a website, since most buyers these days do a great deal of their home search online. Having a website allows you to better showcase your photos and virtual tour. It also enables you to include your URL on your flyers and postcards, ads, and your MLS listing. Google Analytics offers you free website stats so that you can track where your visitors come from, and focus your marketing push on the most effective channels.
Lots of homeowners decide to list their homes as For Sale By Owner in order to save money — and granted a 6 percent commission is a lot of money to save — but don't make the mistake of thinking that FSBO is free. You still need to spend some money on good marketing, because if you don't, your home won't generate the interest you need to get worthwhile offers.
Set a Price
Price is another very important factor in how quickly your home sells. Many homeowners who are selling their own homes think that they can set a price, and if they don’t get enough interest, simply lower it. Not true! The first two weeks after you first list your home for sale are crucial, as that is when the interest will be the highest. If you don’t price the home appropriately from the very beginning, you will lose potential buyers.
The best way to price your home is to find out what other, comparable homes in your neighborhood have sold for in the last three to six months. Calculate price per finished square foot, and look for upward or downward trends during that time. You are better off setting a competitive price and selling your home quickly, than setting too high of a price and lowering it later on.
Set Yourself Up for Success
A great deal of FSBO homes don’t sell, and the homeowner ends up listing with an agent after all. This isn’t because For Sale By Owner is a bad idea, but because most sellers don’t set themselves up for success.
Because the first two weeks are so critical, it is important to get all your ducks in a row before listing your home for sale. Plan ahead so that the website will launch, the ads will run, and the direct mail postcards will all be sent out at the same time as the listing goes live. That means repairs have to be done, pictures have to be taken, and local papers have to be contacted all well in advance of when you plan to list your home. You have one shot at making a grand entrance into the real estate market — make it count, and make FSBO work for you!
Guest Post Blurb:
This is a guest post by Jason Kay. Jason has sold two homes on his own in the last five years. He started FreeHomeOwnerListings.com to provide an affordable online location to advertise your FSBO home for sale.
Heat Maps Equate to Hot Property
Jul 1st
I recently made the decision to continue renting as opposed to rushing into home ownership. Of course, my ultimate goal is to own my own home and I've been tenaciously working towards this goal for over a year. However, the more I research renting versus purchasing a home, the more resources I find that confirm I've made the right choice. Three great online sources of information I've found offer maps that use "hot spots" or "heat maps" to determine the average price of homes in a city, county, or state: Trulia.com, FinestExpert.com, and HotPads.com.
Finding the Truth with Trulia
One benefit to using Trulia is that it lists properties all over the country, not only in large metros like some competitor sites. From Maine to California, Trulia lists properties for sale and rent. The feature I like the most is their "Heat" map. I might be a bit biased on this particular feature given that I love staring at maps, but the color coding overlay helps determine an area's affordability. For example, in Los Angeles County, dark red areas indicate homes priced from $654K and up, where a dark green patch equates to homes below $280K. In contrast, in Mesa, AZ dark red color coding indicates homes above $198K and dark green color coding show homes below $85K. Obviously, the color coding prices change based on a city's median home price.
Trulia also compares rental prices and median purchase price of homes of individual cities and determines which is a better financial option in their Rent-Vs.-Buy ratio report. Their most recent report shows that owning a home in Minneapolis, Phoenix, Sacramento, Long Beach, Fresno, and San Antonio is a better option than renting. However, it makes more sense to rent in Omaha, Seattle, Portland, San Francisco, and New York. The Rent-Vs.-Buy index is based on a 2-bedroom condo/townhouse/or apartment.
FinestExpert Is Just Fine for Me
FinestExpert was created specifically with real estate investors in mind. However, anyone in the market for purchasing a home or renting could benefit from the information they've gathered. Once you type in the specifics you are looking for, square footage, bedrooms and baths, and the city, a map appears (hosted by Microsoft Silver Light software) that lists color-coded tear-drop shaped icons specifying homes for sale. Each color represents an FE code (Finest Expert code). Dark red tear-drops represent a good investment, meaning it's a home that could be fixed up, then used as rental income or resold. Where as dark blue tear-drops represent a "dream home," a home an investor would want to live in instead of resell. The higher the score, the better the investment opportunities. In my experience, their map is a bit quirky. For instance sometimes it takes a while to load and other times it gets stuck on an area. It's also not easy to find the definitions of the FE color coding. The site is still in its Beta testing mode and I think it still needs to work out some of the bugs. However, it's worth checking out to view data.
HotPads Is on Fire
While trying to find a site I stumbled upon and now can’t find (so frustrating!), I found HotPads that offers a rent vs. buy calculator and yet another interactive map. In my opinion, this map rocks the other maps by far. It's not nearly as quirky as some others I've found and it compares rent to purchase price right there on the screen. Trends and charts are easily available at the click of the mouse for a quick city overview. It also hosts a "heat map" index by state, county, and city; the color codes indicate real estate markets hardest hit by foreclosure rates, the "hotter" color indicates states with more foreclosures. I found this map to be quite insightful.
If you’re looking to move, using any of these tools to help gauge your local market could be helpful. Not only could these maps be used to help negotiate a better purchase price, but it also helps determine if renting is a better option in the short-run or long-run.
Book Review – Buying a Home: The Missing Manual
May 21st
Housing prices have dropped all across America in the past couple years, and more people are looking into buying a property instead of renting. If you are an eager house hunter and do not know where to start then Buying a Home: The Missing Manual by Nancy Conner(affliliate link) is the book for you.
The book is separated into four sections. The first is Preparing for Home Ownership. This section discusses the pros and cons of buying a home, and the financial implications of being a homeowner. In this section the author also gives some good tips on improving your credit and lowering debt so that it would be more likely that you will get a loan.
The second is Finding Your Home. This section zeroes into the house hunting portion of the home search. It included a good chart of common euphemisms real estate agents use to make properties sound better than they are. For example, "jewel box" and "cozy" both mean that the house is very small. This section also talks about finding a real estate agent and other professionals that would help with the home search.
The third section is Financing Your Home. This section is important to any home buyer because it discusses the different types of mortgages and closing costs with real numbers and examples. If you could fully absorb this section of the book then you would have a good idea of what to expect on your loan and closing documents. This section may be a little overwhelming to read for those who do not regularly deal with numbers, but it is very important to understand the loan you are getting into before signing the dotted line. The book also goes over the HUD statement so that a potential home buyer knows what the fees are.
The final section is Negotiating and Closing the Deal. This portion discusses what to offer for a home, and how buyers can negotiate with sellers on issues beyond price. For example, buyers could ask sellers to cover a part of closing costs. The book also discusses how inspections work and what happens if things go wrong.
I really liked this book for its straightforward and informative writing style. I also liked that the book was very comprehensive and covers the entire home buying process from beginning to end. When my husband and I purchased his parents’ house I did a lot of research on my own and it took a lot of time to gather all the information that was covered in this book. I could have saved a lot of time if I had this book. One word of warning is that this book is definitely targeted towards American home buyers because the laws and procedures mentioned do not necessarily apply to other countries. However, the general advice on preparing for home ownership and negotiation are useful for any house hunter.
Finally, the book also has a companion website where readers can get updates to the book. Another book in the Missing Manual series called Your Money: The Missing Manual" was recently reviewed by Philip Brewer.
Disclosure: I received a free review copy of this book and the post contains an affiliate link.
How to Afford Payments on Your Adjustable Rate Mortgage
May 19th
So you’ve managed to keep your house, your job, and even your credit report clean during the economic meltdown. But, the storm’s not over just yet. The second wave of foreclosures and economic instability is gearing up to wreak havoc. And what’s worse, you’ve just realized that you are in the middle. Your adjustable rate mortgage is getting ready to adjust and you might not be able to afford the payment.
So what can you do?
There are several things you can do that can help you survive your adjustable rate mortgage. You can achieve this without having to resort to a second or third job or without having to start a home business, although if it’s practical, earning extra income sure can go a long way as well. The options available to you will depend on your current situation, but in most cases you can avoid foreclosure and ultimately get a mortgage with better terms.
Step One: Batten down the hatches and save money!
1. Evaluate new car payments vs old car maintenance costs.
I often wonder why people choose to get new cars as often as they do. If you already own a gas guzzling SUV, it may still be a better move to keep it under certain circumstances: while driving such a car may not seem like the politically correct thing to do right now, paying a little more at the pump at each fill up is still way less than a new car payment. Of course, you may have to weather a few condescending looks from those smart car drivers, but at least you know that you won’t have to call a taxi the next time the ball team needs a ride to the field. Here's more on how to cut car ownership costs.
2. Cut down on credit card use.
This one is a no-brainer. Stop using credit cards unless you can pay them off completely every month. But for many, the temptation to let one’s balance roll over into next month is simply too great. You need to keep a credit card around for emergency purposes, but it should take an act of Congress to get to it.
3. Pay your bills on time and stay out of the red.
Do you have any idea how much money you pay out in late fees? Probably not. I know I didn’t until I started adding them up on my bank statement. On average, we pay $350 or more in combined late fees, bank fees and other “stupid tax” that could instead be chucked away into a high interest savings account. So create a workable budget and stick to it.
Step Two: Get better terms on your loans and mortgage.
1. Consolidate your debts.
People often forget that they may have some leeway with the loans they carry. If you’ve got good credit and have been managing your debt load well, you can possibly negotiate better terms for your existing loans. Using balance transfer credit cards to get lower card interest rates has worked for me. You can also also consider joining a peer to peer lending network to secure better interest rates. You may also want to explore the possibility of debt consolidation as an option.
2. Refinance.
Now it's time to take a look at your adjustable rate mortgage. The best case scenario is to refinance it into a fixed rate mortgage as soon as possible. With an FRM, you'll know what your payment is going to be each month and if you choose to leave any equity you’ve built up in your home, you might actually be able to reduce your payback period from 30 years to 15 or less, saving you a ton in interest. Depending on the amount of equity you have in your house, you may also be able to draw out some cash to place into a savings account or pay off more expensive debt as well (e.g. credit cards and auto loans), although this is something you'd want to weigh carefully. The drawbacks are that not everyone will qualify for refinancing. If you’ve had some hits on your credit, if your house value has significantly decreased or if you lack sufficient funds to cover a down payment and closing costs, then odds are that you won’t qualify.
3. Modify your existing loan.
While not quite as desirable as refinancing your loan, you may qualify for a loan modification. In a loan modification scenario, your lender will adjust the terms of your mortgage — usually by reducing fees and interest — so that the payment remains affordable for you. In exchange for this consideration, the lender will receive a cash incentive from the government and avoid a costly foreclosure. The drawbacks for this process are that not everyone will qualify for a loan modification. In most cases, the borrower has to already be severely delinquent and the reduced interest/fees/principal may be due as a balloon payment at the end of the mortgage.
4. Sell your home.
As a last resort, you may have to consider unloading your house. This is probably the least desirable outcome, but selling your home is much better for your financial standing and credit, than going through a foreclosure. This way, you keep your credit intact and will increase your chances of being able to obtain financing in the future. In certain situations, it may be advisable to sell the house for what you owe (if the balance of your mortgage is less than the value of the home) in order to sell it quickly. The drawback is that this process won’t help if you owe more than your home is worth.
If you find that you are at the verge of getting into financial trouble with your mortgage or you're already in a tight situation and don’t know what to do, call your lender. Do it now because every minute you wait may mean fewer options you have for getting back on course. You may be surprised that there are still many lenders who are willing to work with you and help you get on a path that will keep you in your home and out of foreclosure.
Best Money Tips: How Being Late on Your Mortgage Affects Your Score
May 14th
Welcome to Wise Bread’s Best Money Tips roundup. Today, we tell you how many points a late mortgage payment will cost you, how early retirement might not be smart, and if you can really make any money chasing rates.
Top 5 Articles
How Being Late on a Mortgage Payment Affects Your Credit Score — Think it's just a little ding? Depending on how long you wait, a late payment could really mess with your score! CNN Money via Free Money Finance
How to Avoid Letting Social Media Ruin Your Career — Don't be stupid. Know the rules for posting online, before you lose your job! Money Crashers
Can You Actually Make Money Chasing Rates? Some people swear by it, but is it really a feasible way to make cash? Trent explains. The Simple Dollar
5 Weird Habits that Can make You Rich — They are not for everyone, but this quirky ways of looking at finance can keep you out of debt! Gen Y Wealth
The Dark Side of Early Retirement — If you're still planning on ditching the work force at 65, you may want to reconsider. There are some serious disadvantages that need to be explored! Financial Samurai
Other Essential Reading
Shop for Clothes Like a Savvy Mother — Don't confuse “price” with “value.” Find out what other recommendations the experts make here! Put This On via Lifehacker
Premium Gasoline Possibly Switched with Ethanol E-85 — Oops! A possible recent fuel blunder may affect your car. Find out how you can cash in on this accusation. Consumerism Commentary
Your Future Financial Security Depends on You…and Only You — This is a hard-hitting piece that everyone should read. It really is all about you. Moolanomy
Six “WFT” Credit Cards — These cards aren't exactly the cream of the crop. Find out why before you sign up! Nerd Wallet
Parting with Sentimental Clutter — It's not easy, but it might be necessary! If you're holding on to years' of memories, this read is for you! Unclutterer
Thanks to the Prairie Eco-Thrifter for including us in the Festival of Frugality #229!
Should You Invest in Goldman Sachs (GS)?
May 4th
Goldman Sachs is not in a good place right now:
- The American people are angry at Goldman
- Investors are wary about their stock (it’s down about 13% after the SEC news broke)
- The SEC thinks they may have broken the law
- They are taking the fall for the mortgage crisis and the recession
- They are "the bad guy" right now
Whether you believe Goldman Sachs did anything wrong or not doesn't matter — they are taking a huge public-relations hit right now. If you watched any of the senatorial hearings last week, you know the government is trying to blame them for everything short of global warming.
So why on earth would you invest your money in their stock?
Because Warren Buffett said so…kind of. Let’s go straight to one of his Warren-isms to find out why Goldman might be an attractive stock right now:
Be greedy when others are fearful and fearful when others are greedy
This one does seem to suit Goldman to a T doesn’t it? Oh and guess what? Buffett owns $5 billion worth of preferred Goldman stock (with a sweet 10% dividend) and he’s publicly backing the firm’s reputation.
Goldman Sachs has a reputation of having the smartest people in finance working hard to make as much money as possible. This still holds true today. Whether or not the company is found guilty of any wrongdoing, I personally find it hard to believe that their reputations will suffer much in the long run.
I’m not saying you should buy the stock…but if you liked the stock before and were considering buying it, this would be a great time to get it. A 13% discount doesn’t come around very often.
Warren’s Wisdom
There’s a reason I once wrote that Buffett’s advice is so hard to follow: every bone in your body is probably telling you to stay as far away from Goldman stock as possible. From any finance stocks in general. And maybe you should — but these are times (like the huge drop in the market in 2009) when brave souls take action and are rewarded years down the line.
So next time you feel like investing in a company would be the absolute worst possible idea in the world — remember the words of Warren Buffett and re-consider everything one last time before making up your mind.
More About Goldman
There has been some great stuff written about the Goldman situation, among them is James Surowiecki’s piece in the New Yorker about how this has all happened before and will likely happen again. Even Goldman’s own documents hinted at what they’re being accused of:
The flipbook for the deal at the heart of the current Goldman Sachs scandal warned that it might not contain all material information, offered no guarantee that the information was accurate, and said that there were “potential conflicts of interest” in the deal. It might as well have said “Don’t trust us.”
James Altucher of the Wall Street Journal wonders aloud if GS is a buy:
I’m staying away from it but my guess is by this afternoon or Monday morning shorts will begin to cover, GS will respond, and a new chapter in the financial crisis media buzz will begin.
I’m curious to hear how others feel about the Goldman situation in general and the idea of investing in a company when their reputation is in the midst of taking a colossal hit. Share away in the comments!
Principal Forgiveness: The New BofA Mortgage Deal
Apr 28th
Starting next month (May 2010) or as soon as its operationally ready, Bank of America may reduce principal balances on certain mortgages of deeply underwater loans. This move expands the scope of its National Homeownership Retention Program (NHRP), which was established to make amends for predatory lending practices by Countrywide Financial, which Bank of America acquired in 2008.
The overview of the original program on Bank of America’s website is skimpy on details. A more detailed description of the new-and-improved NHRP indicates that eligible borrowers consist of those who:
- Purchased a primary residence by taking out a subprime mortgage, Pay Option ARM (Adjustable Rate Mortgage), or Prime 2-year Hybrid ARM loan from Countrywide on or before January 1, 2009;
- Are now 60 days or more delinquent on the mortgage loan;
- Have a principal balance that is 120% or more of the market value of the home (LTV).
Loans are to be modified through 1) principal forgiveness and 2) interest rate reductions. The hoped-for result is a monthly mortgage payment that is affordable according HAMP guidelines AND a fully amortizing loan so that borrowers can avoid the scenario of making payments for decades but never shrinking loan balances.
In some cases, the principal reduction isn’t really about lowering the original loan balance to reflect market value but rather undoing the harm caused by interest capitalization associated with negatively amortizing loans. (In plainer language, if you owe more now than you borrowed a few years ago — because interest was added to your loan balance — then help might be on its way.)
But forgiveness isn’t quick, simple, and all-encompassing. The following conditions may apply:
- Principal reductions will be based on borrower performance over a period of 5 years
- Loan term will be extended to 40 years (rather than a standard 30 years)
- Arrearage (past obligations not paid) will be capitalized (added to the outstanding loan balance)
- Principal amounts not forgiven (because there are limits to forgiveness, up to 100% LTV) will be “non-interest bearing and a balloon payment of the forbearance amount will be due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance.” (according to the Final Judgment by Consent PDF indicating the settlement of a complaint filed by the Attorney General's Office of Massachusetts).
The program (both the original and enhanced NHRP) is part of a settlement of lawsuits filed by Attorney Generals of multiple states, such as:
- Alaska settlement (PDF)
- California news release
- Louisiana basic info
- Massachusetts press release on settlement
- Rhode Island press release
- Washington website on Countrywide loans
Check the website of your state’s Attorney General’s office for details on loan programs that may relate to your situation. To see if you are eligible for National Homeownership Retention Program, check Bank of America’s website.
Note that “Countrywide has initiated proactive outreach to eligible borrowers," which seems to mean "we’ll call you, don’t call us.” However, the legal agreements require assistance to a certain number of borrowers so Bank of America needs to find people to help. Borrowers can take action rather than waiting for a phone call.