Your Money Book

The three big financial stories of the last week are all inter-connected, and do affect us all, directly or indirectly:

Last week, the U.S. Security and Exchange Commission charged the investment giant Goldman Sachs, with civil fraud. They are alleging, and it’s only that, until proven in court, that they defrauded investors out of over a billion dollars in selling mortgage backed securities. In the U.S., those are the mortgage packages sold all over the world, and probably in your mutual funds or pension plan, too. Yet, at the same time as they were selling and promoting these, Goldman Sachs was also betting that they would default sooner or later. At yesterday’s hearings in the Senate, there were a bunch of internal e-mails released where their big cheeses actually described these mortgage packages (so call collateralized debt obligations) as crap. Nice they were selling them to investors all over the world, while that’s what they thought of them. Stay tuned, there’s lots more to unfold here.

Yesterday also brought the official word that rating agencies have downgraded the debt that the Government of Greece owes to junk status. In other words, they’ve decided it’s the highest risk debt there is. It’s another lesson for you, me, and governments everywhere, especially in some European countries, that borrowing only works for so long. Greece has a lot of social programs, a very bloated civil service, and debt as far as they eye can see. What the government doesn’t want to do is to increase taxes, increase sales taxes, or to start making drastic cuts to government spending. It looks like now they will be forced to. Until they do, the rich cousin of Europe, Germany, has no intention of lending any more money to Greece. Their thinking is that the drastic cuts have to come first, and Greece has to first show that they can live on what they make. Gee, kind of like we have to – or should! Until then, more refinancing and more loans becomes like giving a drunk another drink.

Ironically, it was Goldmans Sachs who worked with the Greek government a few years back to convert some of their debt into complex financial instruments that nobody could really understand. It did make their finances look a lot better than they actually were. That is what it took to get Greece admitted to the European Union at the time. Ah, shuffling debt around, like we don’t often do that, transferring money from credit cards to lines of credit, and so on. But the chickens always come home to roost.

Finally, as a result of the debt rating for Greece, our Canadian dollar dropped over a cent. It did, but what really happened is that the U.S. dollar rose a lot. Investors were fleeing the Euro and getting their money out of the volatile environment over there, and going to a safe haven for their money – which is the U.S. So it was way more of a U.S. dollar increase than a Canadian dollar drop. The good news is that the U.S. needs investments. Now, we’re talking trillions here, not “you and me” amounts of money. And more money into the U.S. economy allows them to keep interest rates low for some time yet, and that’ll help the economy to speed up, and gives time for the housing market to heal.

Yes, we’re all in this together. What happens in Greece affects us. Because we’re all in one economy together, and money, debt financing, and investments don’t have any borders. Whether we like it or not, some far away problem becomes our problem literally overnight.

After a week in Kansas, I wanted to share a couple of U.S. stories from the world of finance and credit. They’re certainly insights that make you think or just shake your head:

You knew this day had to come: Atlantic City is the #2 gambling destination after Las Vegas in the US. Within ten hours of Atlantic City, there are more than 100 million people to draw from, and that’s a pretty huge market. While it’s possible to get cash advances from credit and debit cards in every casino on the planet, Atlantic City has gone one big step further. Gaming laws have now been amended to actually allow people to use their credit cards right at the blackjack and craps tables for a cash advance! Yes, you heard that correctly. Just sit down at the blackjack table and pull out your credit card. So far, only the Trump Taj Mahal has implemented it. But you know it’s only a matter of time before every casino in Atlantic City, and then Vegas, will roll this out, just to keep up.

JP Morgan Chase, one of the big six credit card issuers who control two-thirds of all credit cards, just announced doing away with a bunch of affinity cards. Those are cards for a specific retailer, where the merchant receives a kick-back. Gone are the Avon card and Starbucks. And if you’re a basketball fan, they also couldn’t get enough interest in the credit cards for the Detroit Pistons and Orlando Magic. Gee, you think the world can do without a few more credit cards??

On television, there’s more and more happy talk about the U.S. economy. While that may be true, in some areas, the foundation of people feeling more secure about their finances is always the value and equity in their homes. And that isn’t getting much better in many of the so-called “bubble states, where there are still over 3 million foreclosures expected this year alone.
But the no-service Bank of America is now seeing the light, and are prepared to do principal reductions of up to 30% on people under water. That is, they’re actually now prepared to help, after writing off billions of dollars in foreclosures. Principal reductions means they will actually cut the balance that people owe on a home that may be worth half of their mortgage. It’ll apply only to sub prime mortgages with insane interest rates, but it’s a start to actually help people and give them concrete hope. They finally figured out that they didn’t need to lose tens of billions of dollars kicking families out of their homes, and then take a massive bath on trying to sell literally millions of empty houses. This is going to be less than half as expensive for the bank in the long run. Too little too late for a ton of families but better late than never…

Two weeks ago we talked about the risk of variable rate mortgages, in an environment where you have to know rates will start to jump up, vs. a fixed rate mortgage. Weren’t we smart, since five days later, the banks raised their five-year rates by 0.6%. And that’s just the start – stay tuned for more increases.

The story had a number of people ask some questions. So here are some of the notes of what you should keep in mind:

On a current fixed mortgage, the bank has guaranteed the rate, but you have signed for a penalty to get out of it. That is normally three months of interest, or something called an interest differential. That is the today rate vs. your rate right now, and takes the difference of what the bank would now be out if you just kept going.

The longer you have left on your current term, the higher that amount. Rough rule of thumb is that two years left or more, it probably won’t make sense to re-mortgage to today’s lower rate. If you have a year or so left, it’d be the three months of interest as a penalty.

But will paying this penalty and getting the chance to do a new mortgage save you money? That depends on what the saving in the rate is from your current mortgage to what you can negotiate today. It also depends on how long you intend to stay in your home. If you’re moving in the next year, there’s no way you’ll save money, you’ll just pay the penalty and won’t be around long enough to get the benefit of the lower rate. If you intend to stay in your home for a number of years, the savings will start to add up quickly.

What you need to do is:

-Get the amount of the penalty. There’s no cost to get it, but at least you’ll know.
-Your bank will offer you a blended rate. They’ll take the penalty and include it in your new mortgage payment. That may be what you can do, but don’t start there. Blending it in is not the same as shopping around for what may be a much better rate in the first place!
-Always get three quotes, and make one of them from the credit union. Their rates are the same or better, AND you will get money back at the end of the year through profit sharing, since you will be a member, not just a customer! For me, that’s like getting a quarter of a percent refunded each year.
-Lenders will guarantee a rate in writing for 60 days. That will let you shop around while you are protected on today’s rates, should they jump again! It does not mean you’re committed, or on the hook. It’s just a guarantee if you want to take advantage of it.
-Negotiate! You will always be able to get around ¾ to one full percent off their posted rates. Remember that posted rates are like the sticker price of a car – and who pays that?
-If you have a variable rate and want to fix it, or want to re-do your mortgage to a lower rate, you have to get the quotes and be prepared to take your business elsewhere.
-Yes, you can negotiate the penalty amount if they get to keep your business. I had a rental property with Scotiabank a decade ago. They wouldn’t budge on the three month penalty when I sold. But that meant they lost my principal residence mortgage. They made $1100 in penalty fees and have lost out on over $40,000 of interest income, because I walked. That didn’t make sense to me, but I got a great deal at the credit union for an hour of work.
-Last, but not least: When your lender says they “can’t” negotiate on the penalty, or the rate on a new mortgage, that’s just not true at all. Can’t means won’t! Remember that or it will cost you a lot of money. Yes they can, with approval of a manager, or even a regional manager. No does not mean no!