You can read about my saga with the Wells Fargo Loan Modification department, and you you can read about how angy I am about my tax dollars going to bailout people while I continue to suffer over here.  But, how many of you are happy that you have a 30 year fixed mortgage?  I remember signing escrow papers on our current house and the lady had to do a quadruple take to see that we had a 30 year fixed.  She said she couldn't remember the last time she saw one.  That made me feel good that my parents taught me fiscal responsibility. 

I don't have to watch the news to see the financial crisis the country is in, I only have to turn to my friends that the mortgage companies have screwed.  Or the dozen people I have layed off in the last 12 months, or all my friends sending their resumes out.  I get angrier and angrier by the day about how everyone is hurting.  I feel bad that I still have a job and I have a fixed mortgage that I can afford (for now).  I'm not the one that got burned - or am I?  My last blog about my experience with the Wells Fargo Loan Modification department has generated quite a stir with at least 40 views a day and multiple emails from people in the same boat.  I started to write a new blog about the new economics and another rant about how I'm unable to take advantage of the low interest rates but was side tracked during my research.  I thought of an interesting situation: what if we had bought our current house and previous house with an interest only loan?  

Our first house was a modest 1000 sq. ft. in Southern California.  Interest rates were falling and prices of houses were climbing.  We looked at a house in a neigborhood we liked but decided to wait a few months and save more money for the down payment.  7 months later, the same houses had appreciated $70,000 - not even close to what we had saved (my losses started before I even bought a house!).  We quickly bought a great house in a great neighborhood while we could still afford one.  We had a 30 year fixed mortgage and refied after two years to bring our rate down to 5.325%, wow!  We lived there for about 4 years and then moved across town to a bigger house.  The previous house had appreciated by 100% so we had a good down payment for the new house.  Again, we went in to a 30 year fixed but interest rates were up and we locked in at 6.325%.  In the 7 years we've been paying a mortgage, I calculated that we have paid (hold on to your seat here) $208,000 in principal and interest!  Then I went back to look at the rates we could have got if we went interest only and calculated that we would have paid (only) $128,000!  This means that we have paid $80,000 more by paying principal at a higher rate than an interest only at a lower rate.  That $80,000 is real money, not paper money, not funny math but, actual money that came out of our checking account.

To add salt to the $80,000 wound, since our current house has depreciated enough that we are now upside down, we would have the EXACT same equity in our house if we had been paying interest only.  AND the banks and government would be trying to bail us out right now.  They would be helping us get a better interest rate.

I've never felt worse about my "fiscally responsible" 30 year mortgage until today.  How about the government help those who helped themselves?  All I want is to drop my interest rate to 5% and not have someone laugh at me when I say I have a high rate at 6.325%.  I'm not asking for the bank to lower my principal.

Tell me, why should I stay in my house?  The toughest choice is the right choice here.  If I were unemotional, I would walk away from my house and let the bank take it over.  In about 3 years my credit would be back up and I could buy something new at half of what they cost now.  That's the right move and I don't think I can do it.  We've poured too much time and work to make this house our home.  We're emotionally attached.  But, another year of our house declining and the government and banks pushing me aside and I will be pushed to walk away.  I won't be the only one doing it either.  Watch the economy collapse in to a dark abyss as the fiscally responsible people get fed up and walk away.

Update 8/4/2009:
Mortgage Modifications Moving At A Snails Pace. What a surprise! But, the real story isn't being reported... why isn't anyone reporting that Wells Fargo is hurting people's credit and taking away homes by telling everyone they won't help until they are late on payments? And then, after your credit has tanked, they deny a modification!

Interest rates are the lowest in four years, foreclosures continue to skyrocket, banks continue to crumple, taxes continue to go up and I want some help.  I have a fixed 30 year mortgage with Wells Fargo at 6.375%.  I have never missed or been late for a single payment in the 3 years we've had them.  Same story for the four years in our last house with a different loan.  I'm a wet dream for a bank in this economy.  With all the bad in their portfolio they need me.  Armed with that argument I called Wells Fargo this morning. 

 

After about 15 minutes on hold they took my information and a few hours later a local refinance specialist called me back.  I explained I was looking for a lower rate at with the same 30 year fixed and he told me he could get me a 0 point loan for 5.25%!  I was skeptical since he hadn't actually asked for my account number so I said: "Does that mean we qualify for a conforming loan".  He asked what my principal was and aftwerwards he said "oh, that changes it."  He did some quick looking up and came back with "It's the same rate with the special conforming (under 729k but over 417k), 0 points for 5.5%."  I nicely pointed out that that is actually a quarter point higher and he sort of shrugged it off.  Testing my luck I asked, "Do I have to have 20% equity in the house for that rate?" to which he replied "Yes."  Oops, another strike against him - as with everyone else, I don't have 20% equity anymore.  When we bought the house we put 26% down; zillow now says the house is worth $10,000 less than we owe on the house.  So, I personally have lost over $200,000 in the past 2.5 years and haven't asked the bank for anything.  Armed with yet another piece of this puzzle, I asked the salesman what my options are.  None, nada, zip.  Wells Fargo will not help me out.  He did give me another number to talk to the Loan Modification department.

Fast forward a few hours to the rude people in the Loan Modification department...

I talked with a lady there and started out saying that my interest rate was high and I wanted them to lower it.  She laughed at me and said "did you say it was 'high'".  Assuming she was high (in another sense) I said, "Yes, it's high.  Your bank offered me 5.25% this morning for 0 points but I don't qualify because I don't have enough equity in the house anymore."  She told me there was nothing they could do since I was a good customer.  Seriously!?  "There is nothing we can do because you are a good customer."  What the hell is wrong with the corporate world?  She said I would have to be deliquent on my payments in order to qualify for them to modify my interest rate.  She made it very clear that I have to continue to be a good customer and make my payments on time but that because of that, they can't help me out.

Wells Fargo would rather me walk away from them than help me with a lower payment.  And there isn't a person in the world that cares about my "plight."  Someone from Wells Fargo, please tell me why you want to get rid of a good loan on your sheets because you don't want to give me even a 6% loan?

Why is it that Government will pledge $200 billion to help Freddie Mac and Fanny Mae and another $700 billion to bail out financial institutions but they won't give $25 billion of that $700 billion to the Big Three? Also, why the hell does the government allow $700 billion to be used to help the economy and there is no clear picture of what they will be doing with it.  Everyday they are changing their strategy.  In fact, yesterday Treasury Secretary Henry Paulson said that he believes our major financial institutions have been stabalized so the money won't be going to them.  If they are stabilized then I think we should get our $700 Billion back!

Back to the Big Three bailout: the Democrats are pushing for the bailout while the Republicans are trying to stop it.  I think the reason can be summed up in one word: Union.  Democrats are very union friendly and Republicans see them as a hindrance on business.  The Republicans are saying they won't bailout an industry that isn't making any moves to help themselves.  How about giving them the money they want under the condition that the unions disappear?  Lower the salaries and the costs to build the vehicles will go down which you can pass on to the customers so your sales go up.  There was a time and place for unions but now there are Federal employeement laws that make a union unnecessary.  I bet if you added that stipulation in to the bailout the aisles would flip; Democrats would be calling foul (after all, who pays for their elections) and the Republicas would be in support.  This country isn't ready to get rid of unions so on a more realistic idea, force high MPG regulations on them.  I want to see 40 MPG gas burning cars (not unproven hybrids) by 2015.  If you can't have 50% of your cars meet that by 2015, the government loans come due in full and you will have to sell off your assets to pay it off.  No more long term loans, give them goals to meet.  If they meet the goals then everyone wins.  If they miss the goals then we aren't out of money for too long.

Frankly, I don't think we should be bailing anyone out.  We got to this place because of greed and businesses not being regulated enough.  Elected officials will never make the hard choices and never be firm enough to make this work.  Taking more of my tax dollars and giving to a car company for a car I won't buy (give me 40 MPG and we'll talk) will only delay our problems and will vaporize more money to get there.

 

I've blogged about the crisis before so I won't reopen my wounds here.  The problem with the government bailout is that it only helps the lenders and the people that took the bad loans.  It ultimately hurts all tax payers and it hurts us 30 year fixed people that put money into our house even more.  Here's why:

 

We put $300,000 down on our house.  It has depreciated about $100,000.  I have lost $100,000 and the bank hasn't lost anything.  I can't write down my loan for the depreciation because the loan is still less than the house.  The people the government is looking to bail out didn't put any money down and their house depreciated $100,000.  If they go to find a new loan, the bank will have to take the $100,000 hit and nothing happens to the home "owner". 

No one knows when the housing market will stop it's downward spiral so investors and the market have no idea how much they will actually lose.  The bailout is designed so that the government will buy these bad loans from the lenders.  The lenders will sale them at a loss but they will get rid of them so they can finally put a number to their loss and it will make the street a little less jittery.  The government is going to then work with the "owners" to lower the principal on the house and lower their rates.  Remember, the government is me and you; it's our tax dollars that are just being erased by dropping the principal of the mortgage.  The owners now owe less on their house and I still owe the same.  They get a better rate and mine stays the same.  This isn't fair to any tax payer and it sends the wrong message to our kids: if you screw up, the government will bail you out. 

The market is bad and people losing their houses is not acceptable so we have to do something.  Read my idea to help after the jump. More...

".25%, interest only mortgage.  Only $105/month on $500,000".

Get real people!

 

The whole mortgage "crisis" upsets me to no end.  People are upset because they were taken advantage of, lenders are going under because people can't afford their loans any more, the media is in a frenzy and of course, the government wants to bail everyone out.  Well, not everyone.  Let me explain. 

My wife and I bought our house in August of 2006, just as the market started to decline in Orange County, California.  We sold our previous house and put every penny of equity in to the new house to keep our loan reasonable.  Both houses were mortgaged with a 30-year fixed loan.  When we signed the loan docs for our current house the escrow lady actually had to do a double-take that we had a fixed rate loan.  She said she hadn't seen one in ages.  Well, we signed the docs and didn't look back.  Our first house was at 5.875% and the new one was at 6.375% - ouch!  We knew we could afford it for the next 30 years and didn't have any risk that it would go higher.  While we were signing the loan docs for our second home with over 30% down, the people that bought our first house were signing a 0% down, interest only loan.  We were paying under $2000 a month for the first house that the new owners were paying over $4000 a month in an ARM!  The market was already coming down and with only paying interest on the loan they had to be delusional to think this was a good idea.

Less than 18 months later, the housing market has turned upside down. The people that have our house are trying to sell it at a loss of almost 30%!  When I say "the people" I actually mean "the bank".  Foreclosures are up all around the country where people just got in over their heads.  Our current house is worth about 10% less than what we bought it  for.  We are currently trying to refinance at a lower rate while keeping our 30 year fixed.  We can keep affording to pay what we have been for the last 18 months for the next 28 years but, if we can get a smart, lower rate then it would be criminal to not look.

Today Hillary Clinton proposed that we use $30 billion of tax payers money to help fend off foreclosures.  That means they will be helping the people who can't afford what they bought and the lenders that allowed them to borrow the money.  Why should my money go to help either of them?  I've already lost $70,000 in my house, how much more do I have to bleed for these people?  Has anyone else noticed that no one will put any blame on the people that accepted the loans?  It is always the lenders fault.  In my experience, it takes two to tango!  Just because a lender's marketing team slapped lipstick on a pig and called a negative ammoritization loan an "option ARM" doesn't mean that it isn't a pig!  These "option ARMs" actually gave the option to the borrow on how much they wanted to pay each month.  They could pay the full interest or just partial.  If they picked partial, the next month cost more because they tacked the unpaid interest on to the principal.   Remember, the people that took these loans were pretty dim bulbs, so if they get a mortgage bill that says "you can pay us $4000, $2500 or $1000 this month" which do you think they picked?  The next month the $1000 turned in to $1100 or more and eventually they get to the point that they can't even afford to pay only partial interest.  They then whine and complain that they were taken advantage of; that the lenders didn't disclose that they would pay more each month or that a 3 year ARM loan would turn in to a variable rate after... wait for it... yup, 3 years!

Banks are tired of foreclosing and are now working with people to give them better rates on the mortgages and to write off the lost value of the house.  Let's assume that someone  "bought" a house for $700,000 and, after paying an option ARM for 2 years owe $720,000 on the house that is currently worth $600,000.  They can't afford to make the payments and instead of foreclosing on them, the banks gives them a new mortgage for only $600,000 at a fixed rate that they can hopefully afford.  The bank takes a $100,000 loss on the property and the "owners" lose absolutely nothing!  Since I have a fixed rate loan, I'm the only one that lost money on my house.  The bank hasn't lost a penny!  We pay in full every month a week early.  Here's the part that angers me the most: the banks will deal with the people that signed these "exotic" loans to give them a better rate but, they won't drop my rate at all.  They don't even see that keeping us at a lower rate instead of making us go elsewhere will help their portfolio.  This is a case where the banks have not given enough power to the people on the phone to see the same vision of producing a better portfolio for the share holders.  Lowering the cost of the loan above only buys them a little time until they foreclose (and waste my tax dollars).  Lowering our interest rate gives them a guaranteed 30 year paycheck.  Instead, they would like me to go elsewhere with my loan!

Let's go back to the quote at the top: ".25%, interest only mortgage.  Only $105/month on $500,000".   I just can't make this stuff up people.  I wish I had my camera on me because this was an actual sign on the back of a truck that I followed a bit on the way home... today!  With everything going on, people are still selling these loans and people are still buying them!

Who's to blame?  The banks (and marketing departments) that allowed these loans, the people that signed the loan docs or the schooling systems for failing both of these people and letting them out in to the real world without any common sense or morals?  I think it's all of them.

This is a touchy blog because a lot of my friends are going to be hurt by this crisis soon.  For the last 2 years I've been telling all my friends and family that didn't own a house to go rent something and wait until Dec. 2009 to start looking for a house.  For the ones that did own something, I've been telling them to decide where they want to live for the next 10 years and either sell their place to get there or stay put; they were going to lose money no matter where they live so get somewhere they you want (and can afford) for a long time.  I really hope my friends don't get burned in this mortgage meltdown!

Here are my suggestions if the government starts to bail people out:

1. Don't help out anyone that has signed loan papers since August, 2007.  If they put themselves in a bad position after that date, they don't deserve my tax dollars.
2. If someone signed an "option ARM" and choose to pay any option other than the maximum payment for more than 50% of the time, don't help them.
3. Don't allow the lenders to put a foreclosed house up for sale for less than 2% of the last sold comparable house.  This punishes their horrible tatics and it protects the value of the houses around the foreclosed house.  If they break this rule, they lose any help the government offers and the difference between the 2% and what they sale for should be levied as a fine to be used to subsidize my property tax.
4. Fine any company that offers an interest only, no money down loan or any other "exotic" loan.  The fine should subsidize the tax payers money to bail everyone out.

Maybe those suggestions are harsh and delusional but dang it, it's my turn to be delusional!