Foolish pride
Is all that I have left
So let me hide
The tears and the sadness you gave me
When you said goodbye
Walk on by
-Burt Bacharach, with lyrics by Hal David
Every day we hear stories about people simply walking away from their obligations – CNNMoney recently reported that “Homeowners are abandoning their homes and, more importantly, their mortgages, rather than trying to keep up with rising payments on deteriorating assets. So many people are handing their keys back to lenders that a new term has been coined for it: jingle mail.”
According to the Federal Reserve, more than 2 million homeowners face higher mortgage rates over the next two years, which means that that foreclosures should spike up to over one million this year, up from the average of 600,000 seen in a typical year. I can’t remember a time when financial responsibility was so low on people’s minds. The trend started when bankruptcy lost its edge of humiliation. Yes, I know that there are times when people get into trouble and need help, but some of the details emerging from the current housing boom/bust turn my stomach.
Some borrowers think that they have no choice but to walk away from their obligations (yes, it was an OBLIGATION, a PROMISE that you made when you assumed the loan). In many cases, it’s hard to fault the logic of walking. It seems crazy to expect that the Smiths in Phoenix, who earn $50,000 in household income, are going to be able to service $600,000 in mortgage debt on two homes—I know: How in the world could they qualify for those mortgages? But that is water under the bridge.
Before you “walk on by” your loan, you should heed the advice of Mike Raimi, CEO of WCS Lending (www.wcslending.com): “the worst thing you can do to your credit is to default on a mortgage!” Mike explained that if you are unable to make your monthly payments, there are specific steps that you should take, including:
1. Contact your lender when you realize that you have a problem. The most important thing to remember is that lenders do not want your house—they are not at all interested in being in the house selling business. In fact, to avoid foreclosure, the worst case for both parties, lenders have a number of options to help borrowers through difficult financial times.
2. Don’t blow off your lender. The first notices you receive will offer information about foreclosure prevention options that may be able to help, while later mail may include important notice of pending legal action. Open your mail!
3. Know your mortgage rights. Find your loan documents and read them so you know what your lender may do if you can't make your payments. Learn about the foreclosure laws and timeframes in your state (as every state is different) by contacting the State Government Housing Office.
4. Beware “foreclosure prevention” companies or attorneys. You don't need to pay fees for foreclosure prevention help-use that money to pay the mortgage instead. Many for-profit companies or lawyers will contact you promising to negotiate with your lender. These may be legitimate businesses, but will charge you a hefty fee (often two or three month's mortgage payment) for information and services your lender or a HUD-approved housing counselor will provide free if you contact them.
Friday, February 22, 2008
Thursday, February 21, 2008
Minute by Minute
As I scoured through the inside poop behind the Federal Reserve’s last meeting, I hummed the Doobie Brothers tune, “Minute by Minute”, especially the last part that goes, “minute by minute…I keep holding on”. It feels like the economy is just barely holding on and the Fed minutes underscored the anxiety that we all feel and the lack of leadership being displayed by the nation’s central bankers.
Yesterday the Fed released minutes from the Jan. 29-30 FOMC meeting, which had culminated in a 50 basis point reduction. The best and brightest economists in our nation noted that “With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the [Federal Open Market Committee] agreed that downside risks to growth would remain even after this action.” Geez—thanks for the update, guys!
To review what has happened: last August, the Fed cut unexpectedly by 50 basis points, then again surprised markets with a larger-than-expected cut at the regularly scheduled September 18 meeting. On Jan 22nd, the Fed enacted the largest cut in 23 years (75 basis points), followed by another 50 bps at the regularly scheduled January 30 FOMC meeting. In the span of nine days, the Fed had reduced fed funds by 29.4%. As a means of comparison, in the aftermath of the 1987 crash, then-Fed chairman Alan Greenspan cut rates by 37 basis points and did so at a regularly scheduled meeting.
Sometimes I feel like the Fed should walk out the door and talk to people who actually are part of the economy, rather than pour over data points. If they had done that last fall, they probably would have started to cut rates more aggressively. Instead, Mr. Bernanke and his Mensa Mavens waited too long to respond to the housing and credit crunch, leaving them no choice but to seem like pawns of the markets.
Here is the question that I can’t answer. According to the minutes, the Fed held a special conference call on January 9th, at which time no action was taken. Then just 12 days later, amid a massive global stock sell-off, but not with any additional economic news, the Fed was suddenly compelled to act. If there was truly “Some concern…expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook," then perhaps the Fed ought to have acted before the market collapse.
Perhaps January was a turning point and we can now expect less wishy-washy action and more firm leadership and confidence from our central bankers. In the end, I am just thankful that the Fed woke up and finally acted and so too are investors, who bought stocks after the minutes were released yesterday. In many ways, markets are indeed just hanging on, minute by minute.
Yesterday the Fed released minutes from the Jan. 29-30 FOMC meeting, which had culminated in a 50 basis point reduction. The best and brightest economists in our nation noted that “With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the [Federal Open Market Committee] agreed that downside risks to growth would remain even after this action.” Geez—thanks for the update, guys!
To review what has happened: last August, the Fed cut unexpectedly by 50 basis points, then again surprised markets with a larger-than-expected cut at the regularly scheduled September 18 meeting. On Jan 22nd, the Fed enacted the largest cut in 23 years (75 basis points), followed by another 50 bps at the regularly scheduled January 30 FOMC meeting. In the span of nine days, the Fed had reduced fed funds by 29.4%. As a means of comparison, in the aftermath of the 1987 crash, then-Fed chairman Alan Greenspan cut rates by 37 basis points and did so at a regularly scheduled meeting.
Sometimes I feel like the Fed should walk out the door and talk to people who actually are part of the economy, rather than pour over data points. If they had done that last fall, they probably would have started to cut rates more aggressively. Instead, Mr. Bernanke and his Mensa Mavens waited too long to respond to the housing and credit crunch, leaving them no choice but to seem like pawns of the markets.
Here is the question that I can’t answer. According to the minutes, the Fed held a special conference call on January 9th, at which time no action was taken. Then just 12 days later, amid a massive global stock sell-off, but not with any additional economic news, the Fed was suddenly compelled to act. If there was truly “Some concern…expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook," then perhaps the Fed ought to have acted before the market collapse.
Perhaps January was a turning point and we can now expect less wishy-washy action and more firm leadership and confidence from our central bankers. In the end, I am just thankful that the Fed woke up and finally acted and so too are investors, who bought stocks after the minutes were released yesterday. In many ways, markets are indeed just hanging on, minute by minute.
Wednesday, February 20, 2008
Between a (Northern) Rock and a Hard Place
Every time I appear on Fox Business News on a day when the US markets are closed, there is some interesting story that emerges from overseas. Last month it was the massive sell-off in Europe on Martin Luther Kind Day, while this week, it was the big announcement from the UK that Prime Minister Gordon Brown’s government had taken control of Northern Rock Bank, PLC, the troubled mortgage lender.
The decision was reached on Sunday, after the government determined that two competing bids from a consortium led by Virgin Group’s Richard Branson and Northern Rock's own board did not add up to enough money. Instead, the government will "temporarily" nationalize the bank led by former Lloyd's insurance market Chief Executive Ron Sandler. The move follows the government’s emergency bailout package last summer of approximately £25 billion ($49 billion), which attempted to stave off the country’s first bank run in more than a century.
You may think that this sounds crazy—when has the government succeeded in doing a better job managing anything than the private sector? Well, you might be surprised to learn that in certain cases, specifically when it comes to failures in the banking sector, the government may actually be a better choice. In fact, in the US, we have a mechanism for doing this: it’s called the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent agency created by Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.
When FDIC was not enough, the government established other organizations to handle the disposition of insolvent financial institutions: in 1989, Resolution Trust Company (RTC) disposed of failed Savings and Loans (S&Ls); in 1985, the Federal Asset Disposition Association (FADA) dealt with selling the assets of S&Ls; and in 1933, the Home Owners’ Loan Corporation (HOLC) refinanced mortgages, foreclosed on defaulted mortgages and sold foreclosed houses. In each case, the entities faced far more severe problems than an isolated bank problem.
I am not well-versed with the British system, but from what I understand, there is some form of insurance on accounts similar to the $100,000 offered by FDIC, but there is no formal entity that deals with bank failures, which is why this week’s government move seems necessary. The hope is that the government will maintain the business and then sell it or its parts later, when financial markets improve. Until that time, the government’s role will be to create stability and to assuage depositors who want to make sure that their money is safe within the bank. The success of the plan will be evident years from now, but at this point, it seems like a reasonable solution.
The decision was reached on Sunday, after the government determined that two competing bids from a consortium led by Virgin Group’s Richard Branson and Northern Rock's own board did not add up to enough money. Instead, the government will "temporarily" nationalize the bank led by former Lloyd's insurance market Chief Executive Ron Sandler. The move follows the government’s emergency bailout package last summer of approximately £25 billion ($49 billion), which attempted to stave off the country’s first bank run in more than a century.
You may think that this sounds crazy—when has the government succeeded in doing a better job managing anything than the private sector? Well, you might be surprised to learn that in certain cases, specifically when it comes to failures in the banking sector, the government may actually be a better choice. In fact, in the US, we have a mechanism for doing this: it’s called the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent agency created by Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.
When FDIC was not enough, the government established other organizations to handle the disposition of insolvent financial institutions: in 1989, Resolution Trust Company (RTC) disposed of failed Savings and Loans (S&Ls); in 1985, the Federal Asset Disposition Association (FADA) dealt with selling the assets of S&Ls; and in 1933, the Home Owners’ Loan Corporation (HOLC) refinanced mortgages, foreclosed on defaulted mortgages and sold foreclosed houses. In each case, the entities faced far more severe problems than an isolated bank problem.
I am not well-versed with the British system, but from what I understand, there is some form of insurance on accounts similar to the $100,000 offered by FDIC, but there is no formal entity that deals with bank failures, which is why this week’s government move seems necessary. The hope is that the government will maintain the business and then sell it or its parts later, when financial markets improve. Until that time, the government’s role will be to create stability and to assuage depositors who want to make sure that their money is safe within the bank. The success of the plan will be evident years from now, but at this point, it seems like a reasonable solution.
Tuesday, February 19, 2008
Enough is Enough
One of the worst duet pairings in history had to be Barbra Streisand and Donna Summer. That being said, I started humming their awful disco song “No More Tears (Enough is Enough)” after talking to a couple of retirement plan participants about their 401 (k) allocations.
I can’t believe that I still have to discuss concentration of company stock in 2008, when back in October, 2003 I wrote the following: “Remember when all of those people who worked at companies like Enron, WorldCom and Williams Cos. lost their life savings inside their retirement accounts? There was a flurry of Congressional calls for reform of 401 (k) plans, centering on the idea that maybe it wasn’t such a great idea to have company stock inside a retirement plan.”
At that time, everyone was going to come together---regulators, who would tighten up pension laws and protect plan participants from becoming too exposed; employers were going to bring in third party educational programs that would extol the basics of diversification; and employees were going to better manage their nest eggs to protect themselves the next time. Almost five years later, I am here to report that the regulators and the companies lived up to their end of the bargain, but plan participants continue to pile up company stock in their retirement accounts despite the hope that the massive post-dot-com losses would encourage different behavior.
This time it’s not the companies who are to blame—it’s the employees themselves. An analysis of data from Pensions & Investments found that the 65 biggest corporate defined-contribution plans for which data were available had $325 billion in combined assets, and roughly $86 billion—or 26%—of that was in company stock and many large corporations like GE and Chevron have more than half of their 401(k) assets in company stock.
I have recently encountered folks who continue to have far more than the 5-10% of company stock (the level that most advise is reasonable for participants) in their 401 (k) plans. For these two guys, the bet has paid off—each had beaten returns posted by the S&P 500 over the past year. I exclaimed, “That’s great! Now it’s time to take that money and reallocate.” Both had the exact same response: if it’s beating the index, why would I want to reallocate? The answer is easy: imagine if you were an Enron employee and you could have sold your position at tremendous gains? Instead you stubbornly hold on to your stock and are eventually wiped out, crying “it’s just not fair!”
This time around, there will be no tears from me for those who encounter losses due to over-concentration. Regulators and corporations alike have acted responsibly, but many retirement plan participants continue to do the same dumb thing and expect different results. To quote a most unmemorable song:
No more tearsIs enough is enough is enough is enough is enough is enough is enoughIs enough!
I can’t believe that I still have to discuss concentration of company stock in 2008, when back in October, 2003 I wrote the following: “Remember when all of those people who worked at companies like Enron, WorldCom and Williams Cos. lost their life savings inside their retirement accounts? There was a flurry of Congressional calls for reform of 401 (k) plans, centering on the idea that maybe it wasn’t such a great idea to have company stock inside a retirement plan.”
At that time, everyone was going to come together---regulators, who would tighten up pension laws and protect plan participants from becoming too exposed; employers were going to bring in third party educational programs that would extol the basics of diversification; and employees were going to better manage their nest eggs to protect themselves the next time. Almost five years later, I am here to report that the regulators and the companies lived up to their end of the bargain, but plan participants continue to pile up company stock in their retirement accounts despite the hope that the massive post-dot-com losses would encourage different behavior.
This time it’s not the companies who are to blame—it’s the employees themselves. An analysis of data from Pensions & Investments found that the 65 biggest corporate defined-contribution plans for which data were available had $325 billion in combined assets, and roughly $86 billion—or 26%—of that was in company stock and many large corporations like GE and Chevron have more than half of their 401(k) assets in company stock.
I have recently encountered folks who continue to have far more than the 5-10% of company stock (the level that most advise is reasonable for participants) in their 401 (k) plans. For these two guys, the bet has paid off—each had beaten returns posted by the S&P 500 over the past year. I exclaimed, “That’s great! Now it’s time to take that money and reallocate.” Both had the exact same response: if it’s beating the index, why would I want to reallocate? The answer is easy: imagine if you were an Enron employee and you could have sold your position at tremendous gains? Instead you stubbornly hold on to your stock and are eventually wiped out, crying “it’s just not fair!”
This time around, there will be no tears from me for those who encounter losses due to over-concentration. Regulators and corporations alike have acted responsibly, but many retirement plan participants continue to do the same dumb thing and expect different results. To quote a most unmemorable song:
No more tearsIs enough is enough is enough is enough is enough is enough is enoughIs enough!
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