Tag Archives: finance

Links for September 27th

  • Bloomberg: Obama Lawyers Signal Likely Supreme Court Appeal on Health Care
    The White House wants to end the federal appeals court rulings on the president's health care reform, and for the Supreme Court to take up the case. That's likely to bring a decision in June, in the middle of the presidential campaign. "President Barack Obama is trying to resolve the legal issues on his watch, said Alex Castellanos, Republican consultant. 'This is not politics,' he said. 'This is governing.'" Damned straight.
  • NPR: Silence From Rep. Bachmann As Vaccine Challenge Expires
    Remember the bioethicist's $10,000 challenge to Michele Bachmann if she would simply identify a single person who was rendered mentally retarded by the HPV vaccine? The money would have gone to Bachmann's charity of choice. That's an easy $10k, right? Apparently not—Bachmann couldn't do it. And of course not: her repeated claim that middle school girls have received the shot and promptly been rendered retarded is ridiculous on its face. It's important that dangerous lies like this be responded to like this, because the alternative is for people to come to believe that it's true.
  • Wikipedia: Tontine
    A tontine is an investment system by which a bunch of people pay into a pot and take their proportional share of the interest on a regular basis. As more participants die, the remaining participants all get a greater share of income with each payment. The last person alive gets a lump payment of all the remaining money. It was popular in the 1700s and 1800s, but they've both fallen out of favor and made illegal in many places.

How we got our mortgage. Or: Why so many people bought houses they couldn’t afford.

Our loan officer was insistent: we’d be nuts not to get an adjustable rate mortgage.

It was October of 2007. We’d met with this SunTrust loan officer—I’ll call him “Jim”—a couple of times so far, and we were moving ahead with a construction loan to be rolled into a permanent loan when our new house was built. I told him that, no, we wanted a 30-year fixed-rate mortgage. We are fiscally conservative, risk-averse, and intend to die in this house—it’s not like we’ll sell it a few years after we move in. Jim looked at his over the top of his reading glasses, adopted a paternal tone, and informed us that an ARM was the only sensible mortgage for us to get. We could just refinance in a few years, when rates would probably be lower. Plus, by the time the rate reset, we’d be making more money anyhow, so we could just deal with the problem then. Plus, based on our income and credit scores, he could give us a mortgage of substantially over half a million dollars, so we could have a house twice as big as the one we’d just paid Artisan Construction to design for us.

I felt a bit stupid. Here was this loan officer, who clearly knew a lot more about this than I did, insisting that we should take more money, that we should get a cheaper mortgage. The Dow Jones had broken 14,000 that very day, an all-time high—the economy was roaring along. At that time, I wasn’t equipped to refute his logic, but I didn’t want to look stupid by backing down, so I cast my gaze down, and quietly repeated that we would feel more comfortable with a 30-year fixed-rate mortgage. Shaking his head, he agreed to proceed accordingly.

Fast forward to our next meeting, in mid-March of 2008, when we were proceeding with construction. The stock market dropped below 12,000 that day, one fifth of the value of the economy having vanished in the past six months. The phrase “real estate bubble” was on everybody’s lips, and “subprime mortgages” was a phrase that most of us had learned by then. The bottom had fallen out of the housing market, a result of lending too much money to people who could barely afford their pre-reset ARM payments. When we walked in, I laughed a little at the recollection of Jim’s insistence on an ARM six months prior, and said, chuckling to indicate that I meant no harm, “good thing we didn’t take that half-million dollar ARM, huh?”

Jim looked at me, puzzled. What, he asked, would be the problem with that? I pointed out the collapse of the housing market as a result of ARMs. He didn’t comprehend. Was he not aware that the economy was crumbling? Did he not know it was because of the very lending practices that he was practicing just a few months prior? All of the above? I don’t know, but it was clear to me that he had no idea of what I was talking about. That got us back on the topic of an ARM, and we actually repeated the conversation that we’d had the prior year. He still thought we should get an ARM. He adopted the same paternal tone. He shook his head, disappointed in our short-sightedness. But this time—having had the same crash course in mortgages and the economy as the rest of the country, one that Jim had somehow missed—I had the confidence to know that an ARM would be a very, very bad idea.

It was at this juncture that we realized that Jim knew absolutely nothing about mortgages, finance, or economics. He just knew about getting people to sign pieces of paper. He had some paper that needed signing, and there we were. It was that simple.

Things went to hell pretty quickly from there. Jim ordered an appraisal of our property, and the appraiser returned a report that he generated without ever stepping foot or even seeing our land. The included photos of our property were actually of our neighbor’s property. The shockingly low appraisal compared our house to houses nothing like ours, claimed that our (unbuilt) house was built 1,008 years ago, and reported that our remote, mountaintop building site was subject to busy traffic, erosion, drainage problems, wetlands, was on a fault line, prone to fires, had a cave, a sink hole, a foul odor, dioxins, a pit mine, an infestation, endangered species, and a ravine. When I confronted Jim about this, he told me, “this guy’s been in the business for thirty years, so I think he knows what he’s doing by now.” The appraisal was right, I was wrong. In the meantime, mortgage rates had climbed, we had locked into SunTrust months prior, and so we were stuck with Jim. We repeatedly scheduled closings: April, May, June, July, and August. Jim repeatedly failed to make them happen, for reasons that he couldn’t quite explain. We started to wonder if he’d embezzled our deposit (he hadn’t), and tried to get his supervisor to intervene. It was almost too late in the year to start building, after several months of Jim dragging his feet. We hired a lawyer. Just in case, we hired another one. One of them uncovered that Jim had botched the interest rate lock-in paperwork, which both left us without enough money to build the house and gave us an out from our relationship with SunTrust.

It took a couple more months, but SunTrust agreed to give us our money back and let us out of our contract. Matt Hodges at Compass Home Loans was really helpful to us. (Though we’d hoped to get a mortgage with him, the collapse of the banking and housing industries left him without a market for us.) We had to start the process all over again, delaying construction by a year. In the meantime, we needed to start the month-long process of building the driveway—late summer being the perfect weather to do so—and, lacking a mortgage, we had to pay for that out of pocket, an expense that ate up our savings and left us in debt.

We wound up getting a construction loan / mortgage with First Citizens Bank. Why them? Because our loan officer, Susan McGuinnis, knew what she was talking about. She was cognizant of the world around her. She had a blog. And First Citizens is headquartered nearby, in North Carolina. Best of all, First Citizens hadn’t pressured dopes like us into getting loans that we couldn’t afford, so they hadn’t taken bailout money. The good news about the amount of time that elapsed between working with SunTrust and locking in a rate with First Citizens is that mortgage rates dropped enormously, with the prime rate going down by 20% in that period.

First Citizens has been great to work with, and we’ll close on a mortgage with them shortly. SunTrust? Wouldn’t touch ’em with a ten-foot pole.

A nation turns to frugality.

I read a pair of articles about the economy today that are surely bad news, but that give me hope in the long run.

The New York Times reports that carmakers worry that this is the new normal, that the go-go car sales day of the past 15 years was a bubble. This was the bit that really got my attention:

After an era of excess indulgence, we’re now entering a prolonged period of conservation,” said John A. Casesa of the consulting firm Casesa Shapiro Group. “Trading in a car every three years is a luxury that the average American can no longer afford.”

WTF? The average American could afford to trade in their car every three years? That’s totally unreasonable for anybody who isn’t flat-out wealthy. I certainly hope Casesa is misrepresenting the situation, but the point is that things have improved, albeit under significant economic duress.

The second article is in the Wall Street Journal, explaining that Americans have started saving money again. In the past decade or so, the U.S. saving rate has been negative—people have actually spent more than they’ve made, consistently and nationally. That speaks very, very poorly of our nation. Household debt has grown every year in this country since 1952, but it finally dropped last fall, in tandem with consumer spending growth. This isn’t a lack of income resulting in reduced spending, it’s people saving money that they would otherwise have spent. Economists forecast that the savings rate will climb to anywhere from 3%-10%.

With regard to the larger economy, both of these things are terrible news. The modern U.S. economy is premised on a high level of consumption and a low level of savings. But our country is in dire need of frugality, both governmentally and individually. If the average household spends more than they make, how can we be surprised when our government does the same? I’m not an economist, so I’m not knowledge enough to be able to consider this fully, but surely it’s got to be good for us in the long run to return to thrift.

Fannie Mae renting out foreclosed homes.

I’m happy to see the news that Fannie Mae will be allowing renters to continue to rent homes that have been foreclosed on. But I think it’ll be better if this is expanded to include renting back owner-occupied homes, too. It seems to me that this is just smart business—I imagine most lenders would be smart to establish this. They foreclose on a $300k house because the owner can only swing $1,500 of the $1,800 monthly mortgage, so the bank goes from making $1,500 to $0, plus they’ve got themselves a vacant dwelling, which is trouble. Better to convert the house into a rental, so that its occupants can continue to live there. This would be a boon for existing property management firms, or an opportunity for lenders to buy or establish property management groups of their own. With the caveat that I don’t know anything about potential tax benefits of a lender taking ownership of distressed property and then idling it, this approach seems like a win/win.

This American Bailout.

I have found that I know significantly more than your average joe about the cause of the nation’s financial meltdown. That is wholly attributable to spending one hour listening to “The Giant Pool of Money,” This American Life’s May episode entirely about the topic. I recommend in the strongest possible terms that you listen to this. On the drive back home from Avon, NC today I listened to “Another Frightening Show About the Economy,” TAL’s followup show that addresses the events as they unfolded between May and last Friday. And now, at last, I believe I understand how things took a turn for the worse and why the bailout was necessary. Again, I recommend strongly listening to this episode. There’s simply no other media outlet that is going to dedicate this much time (or ink) explaining what’s happened.