Home Loan Focus

Archive for July, 2008

We mentioned in a former article that one of the largest mortgage companies in the US collapsed this week.  That’s a sign that the mortgage crisis is turning into a banking crisis.  At the same time that happened Freddie Mac and Fannie Mae’s saw a massive devaluation and are threatened with failure as well.

If banks lose the ability to sell off your mortgage to Freddie Mac and Fannie Mae that will leave them with no other choice but to negotiate a better deal with you in several areas whether you are trying to refinance a mortgage or even buy a foreclosure property from them.

Today, for the most part, banks do not have to deal with you very much when you are in trouble nor even when they are in trouble.  They have a get out of jail card from Freddie and Fannie, but if that option goes away sometime soon, they might have to make a deal and work with their customers to stay afloat and that could be just the lifeline you need to save your house or even to get a great deal.

Freddie Mac is not the only Mac company to get in trouble this week. California-based IndyMac, one of the largest US mortgage lenders collapsed under the credit crisis this week. Federal regulators barged in and seize the assets of the bank fearing that it could not meet withdrawals from its depositors.

It is the second largest bank to fail in the United States history. This happened on the same day that stocks in Freddie Mac and Fannie Mae dropped by 50%. Just like historical bank runs, depositors had withdrawn $1.3 billion from the bank in the 11 days preceding its collapse.

Depositors are only covered by the federal government for up to $100,000 in deposits. This is a rule that’s been in place since the Great Depression and anyone that hasn’t paid attention to banking law or federal deposit insurance was sadly misinformed and ignorant of their liability.

The subprime crisis is now entering into a stage where it is creating bank failure and depositors around the country need to be aware that they should not have more than $100,000 deposit in any one bank. Given the current climate if they have more than that they might as well be investing in ostrich feathers for all the good the money might do them at the bank collapses just like IndyMac did.

I don’t recommend it all the time, however there are certain situations where you will benefit from taking everything you own when you move. If your company is footing the bill for your corporate relocation, and your budget and the success of your company are not tied to the amount spent on your relocation, then you should definitely consider taking everything you own when you move as opposed to selling it or donate in it or just giving away.

When you get rid of your stuff during a move and arrive at the new destination and move in, you will be tempted to buy more stuff. That’s going to cost you a lot of money as you work to outfit a new household. That means that you be spending a lot of money that you would’ve not spent otherwise and your move will suddenly become that much more expensive.

If your stuff was so bad already you would’ve gotten rid of its and bought something new. There’s no reason to get something new when you move just because you’re moving, unless you have to pay for the shipping or freight of your stuff and that cost is more than what it would cost to buy something new.

Gas prices are higher and freight is higher as well, but it is still often times cheaper to keep what you have than it is to buy something new. So don’t feel afraid to call someone to shlepp your stuff and tell them to ‘Move It All’, whether you are moving east, south, west or even directing your movers New York to, you will probably save money by keeping your stuff.

We previously talked about some of the problems that Fannie Mae and Freddie Mac have on Wall Street this week. If you are a severe optimist, you might see potential for an interest-rate drop in these events. This runs a little contrary to conventional wisdom because if these firms have no fail interest rates will likely rise.

There could be an exception to that scenario if the US government takes control over these companies. That could in fact increase solvency and provide a significant amount of capital to enable new loans to continue bust increasing the supply of mortgages and possibly triggering a drop in prices, which for mortgages take place on the interest rate.

Personally I doubt their failure will help mortgage rates much, and I doubt even more that will help the US economy or the federal deficit, but there is a remote possibility that it could actually help things. I’m not going to gamble on it myself and I don’t recommend that you do either.  If you must gamble, save it for your Vegas vacations, that city definitely needs some financial help.

For many people in the corporate world, at some point or another your company is going to ask you to relocate somewhere around the country and offer to foot the bill. This may sound like a great deal because they’re offering to pay for you to move, but the reality is there are thousands of dollars of hidden expenses involved in this process.

When your company offers you a chance to move, you need to make sure that they’re also offering you a major payraise. If you’re not going to see a payraise of at least $15-$20000, odds are this move is going to take many years to pay off or for you to at least break even. I realize were going through a recession right now and so many people will be tempted to take what they can get and keep what they have, but with inflation increasing you definitely don’t want to move across the country for the same amount money that you received today.

You have to also watch out for all of those third-party contract companies that are there to assist you with your move. They are probably working on a very cozy contract with your company and they don’t necessarily have your best interests in mind and maybe not even the best interest of your company. Even though your company is paying for some of their services make sure that you give them a critical look at every decision they make on your behalf. They might offer to put you in corporate housing for a month for example, charging your company $4000 a month for your rent. That’s a lot of money and if you don’t get out of corporate housing on time you may have to pay that $4000 a month rent bill. So before you move in a corporate housing make sure you can get out on time!

You have to be careful when it comes to storing your stuff as well. Your company might offer to store your valuable possessions for that month while you’re in corporate housing. However if you are unable to close a deal on a house for example within 30 days you could be stuck paying the bill for corporate housing as well is paying the bill for additional storage of your stuff.

So where possible don’t sell your original house until the last minute if you can. Keep your stuff in a place where it’s cheaper free as long as you can. You might even consider trying to avoid corporate housing even if you have to pay the bill. It might not be bad for a week or two while your house hunting, try and stay away from it as long as possible.

Consider also that your company is footing the bill and that money is coming out of their budget. If your bonuses tied to the budget of the new department that you’re moving to and you are inflating the cost of that department your chances of receiving a bonus which could be worth a lot more than a couple thousand dollars could be jeopardized by your own actions.

There are many other areas where relocations can cost you some serious money so make sure you keep a critical eye open to everything that’s going on and try not to get rushed in your decisions while you’re moving. Sometimes the best move is not to move at all.  You might be better off looking for a different job, even one that pays slightly less in the location you live in now.  A move can cost you a great deal of money in the first few years following the move.  Taking a couple thousand dollar pay cut with the option of staying put, could actually enable you to move financially ahead.  Then you can use some of that money that you saved from staying put, to take the family on a couple Disney cruises or invest some money in solar panels for the house or a better telecommuting setup so that next time around, you will be prepared to not move and to work from home permanently!

That big Whooosh sound you heard this week is probably the sound of Freddie Mac and Fannie Mae sucking serious wind. You may wonder how that will affect your ability to buy a house.

Here’s where the rubber hits the road in mortgages. On any given day a bank takes in deposits from people that are actually saving money. They then turn around and loan that money out to people in the forms of loans and mortgages.

Those loans or mortgages represent an asset on the books of the banks. The banks don’t like to sit on these assets, especially recently when they’ve made so many bad loans, so they look for a sucker to buy their bad assets. As it turns out there were two major suckers out there, Freddie Mac and Fannie Mae.

These institutions by the assets and have recently lost a lot of money as they started to realize that many of the loans and mortgages were garbage. That loss of money has hit their investors very hard in this week on Wall Street or stock prices plunge down to next to nothing.

They claim to have a lot of money in reserve, we’re talking cash on hand or cash that they can draw on through loans from banks or other investors. If they run out of money they can’t keep continuing to buy mortgages from banks are trying to sell them in those banks will either have to keep their mortgages on their own books or stop making mortgages altogether.

That would very likely represents situation it would cause interest rates to rise as banks take on greater risk and the available market or money tightens up as two of the biggest firms that securitize mortgages go away.   So the big question is, who will actually come to the rescue of these two firms to keep the pyramid scheme of US banking up and running? 

Right now, you can hardly even track investors bailing out of these institutions with gps fleet tracking systems, let alone find someone daring enough to throw good money after so much bad money.

The CIT Group announced the sale of its home loan business including regular home mortgages as well as manufactured home mortgages.  The company by many analysis estimates came close to bankruptcy as they suffered through 4 quarters of losses after making too many bad mortgage loan calls.

After personally doing business with CIT in their core business, Business Loans, for several years, I have to wonder if the mortgage loan business exit surgery is more endemic of a larger problem at CIT.  There are aspects of their business that are very tight, when it comes to processing and collecting payments and other aspects.  However, they seem to have a collective short coming in my opinion when it comes to evaluating loan risk and underwriting loans.

So far business loan defaults have not made the headlines that mortgage defaults have, but as more businesses suffer the impact of inflation, higher fuel costs, and a slow down in the global economy, the CIT’s core business may suffer strains that may not fair any better than its mortgage business.  With many large office and processing areas around the country, some of which I have visited personally, I expect that cut backs will likely follow and this might even harm CIT’s real competency (running tight processes in transactions) which could destabilize the rest of the business.  The famous (some would call them infamous) debt collectors of business bad debt, might find themselves in the cross hairs of debt collectors if that happens and they do not have a large number of real assets to sell off to pay down their debt.  You sure can’t put out a financial fire by selling off the office furniture…