Personal Finance Blog By MoneyRates - March 2011

Banks warn of heavy fines from faulty foreclosure practices

February 28, 2011

| Money Rates Columnist

Major U.S. banks are warning their investors that the banks could be facing large fines and tarnished reputations as a result of federal and state inquiries into whether they mishandled hundreds of thousands of foreclosures last year.

In the wake of a flood of foreclosures, banks are accused of having foreclosed on homeowners who didn't have it coming and for signing off on enormous foreclosure document packages without ever reading them. Meanwhile, customers reported that it was often impossible to talk to anyone associated with their bank to explain their situation in an effort to avoid foreclosure.

Foreclosure-happy

It's still unclear why banks were so eager to foreclose on so many homes that didn't merit foreclosure proceedings. The practice has contributed to a massive inventory of foreclosed homes that has driven down housing prices dramatically in the last three years, hurting banks and mortgage businesses immeasurably.

The practice further eroded the reputations of many banks, that triggered the foreclosure crisis by handing out mortgages to borrowers without fully investigating the customers' ability to make payments. To make matters worse, the mortgages were for homes that were dramatically overpriced.

The banks' practices both before and after the foreclosure crisis are being scrutinized by state and federal regulators, and in filings with Securities and Exchange Commission last week banks such as Wells Fargo, Bank of America and Citigroup hinted for the first time that they are facing steep fines for their misdeeds.

Although current mortgage rates and refinance rates remain low, many home buyers and homeowners have been leery of entering the housing market for fear that the foreclosures will continue to drive down housing prices. Instead, consumers have been socking money away in savings accounts and money market accounts.

Investigations and fines

A task force of federal bank regulators investigating the 14 largest mortgage services has already uncovered a number of problems, including lazy work habits and documentation errors. In addition to any fines that are expected from the probe, banks are also facing demands from private investors who want the banks to buy back billions of mortgages because of improper loan practices.

JPMorgan Chase, Citigroup, Bank of America and Wells Fargo are also facing $42 billion in losses if the two housing finance companies Fannie Mae and Freddie Mac are able to prove that the banks should have to buy back mortgages that did not meet stiff underwriting requirements.

Posted in: Personal Finance

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Consumer confidence is up, but economic concerns still present

February 25, 2011

| Money Rates Columnist

Americans' confidence in the economy is at its highest level in three years, but people are worried about rising prices for food and gas, and about half of us expect our incomes to drop in 2011.

That's the latest finding of the Thomson Reuters/University of Michigan consumer sentiment index. It found that the recently extended tax cuts as well as the reduction in wage taxes, which are dropping from 6.2 percent to 4.2 percent, improved the American consumer's outlook on the economy and on employment prospects.

Still, the concerns about rising prices are likely to affect our buying attitudes in the coming months, the survey found; people are worried not only about gas and food going up but also about what rising prices for a "wide range" of household goods and vehicles will have on their checking account and savings accounts.

How economics reflect public sentiment

Economists study consumer sentiment closely because consumer fear, optimism or wariness has a profound effect on economic activity. For instance, since the housing market crashed and the recession started, people have tripled the rate at which they are putting money into their savings accounts and money market accounts, and they are paying down their debts in an effort to give themselves some breathing room in the event of further financial turmoil.

But the latest survey found consumers largely upbeat. For instance:

  • For the first time since 2005, more than half of those surveyed felt business conditions had improved from the previous year.
  • Twenty-nine percent of those surveyed feel the unemployment rate will fall, while 21 percent expect it to climb. The jobless rate was 9.0 in January 2011, down from its peak of 10.1 percent in October 2009.
  • Of those surveyed, 37 percent said they are worse off financially that they were the previous year, compared to 28 percent who said they are doing better. That's an improvement, however. Since the financial crisis took hold in mid-2008, there has been only one out of 18 months when a majority of those interviewed during in the monthly sentiment survey didn't think they were worse off than the previous year.

According to the New York Times, the largely optimistic outlook of the survey was tempered by powerful concern that consumers won't have the income to keep up with prices. More than 50 percent said they would not be able to keep up with inflation in the coming year, with nearly 25 percent expecting the reason to be due to a decline in their family income.

Posted in: Personal Finance

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Mortgage rates reach a significant landmark

February 14, 2011

| MoneyRates.com Senior Financial Analyst, CFA

30-year mortgage rates passed a significant landmark last week, rising above 5 percent for the first time since April of last year. Still, it's important to keep these things in perspective: current mortgage rates are still historically cheap.

Current mortgage rates: rising, but still a bargain

According to mortgage finance company Freddie Mac, 30-year mortgage rates reached 5.05 percent last week. Current mortgage rates are now more than 80 basis points (0.80 percent) higher than they were four months ago.

That's a steep rise, but lest that make current mortgage rates seem pricey, consider this: in roughly forty years of mortgage history, dating back to 1971, 30-year mortgage rates never got as low as the current 5.05 percent level until 2009. They've been as high as 18.45. So, in the scheme of things, 5.05 percent is still a very, very low mortgage rate.

It is important that potential home buyers get the right message: current mortgage rates have risen swiftly, but are still cheap. That should signal action rather than inaction, because the steep rise is a reminder that rates may not remain this low for long.

A disconnect from CD, savings, and money market rates

One other noteworthy thing about the recent rise in mortgage rates is that it is in sharp contrast to the lack of movement--upward movement, anyway--on behalf of CD, savings, and money market rates.

Why would banks raise mortgage rates but not rates on deposit accounts? In fairness, there is a fundamental difference. Mortgage rates are long-term in nature, while deposit rates are short-term. Moves in long-term rates may be more anticipatory in nature, because they have to reflect trends that may be in place for years. With a strengthening economy--and perhaps rising inflation--mortgage rates could not have expected to remain at their extreme low levels.

Of course, banks also know how their bread is buttered. Mortgage rates represent money coming into a bank, whereas deposit rates represent money they pay out. Is it any wonder they should be quicker to raise mortgage rates?

Posted in: Miscellaneous

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New report shows credit card fraud, identity theft down significantly

February 11, 2011

By Barbara Marquand | Money Rates Columnist

The number of cases of identity theft in the U.S. fell by 3 million in 2010 over the previous year as the total amount of money lost dropped nearly $20 million from the $56 billion lost in 2009.

That was the good news that came from the Javelin Strategy & Research "Identity Fraud Survey Report." The bad news was that the amount of per-victim fraud increased--from $4.607 in 2009 to $4,991 in 2010.

New account fraud, when someone opens a new account in someone else's name--rather than exploiting existing savings accounts or an existing checking account--contributed to the rise in costs.

The results are based on interviews with more than 5,000 adults.

Here are some other key findings from the report prepared by the Pleasanton, Calif., market research firm:

  • The out-of-pocket cost to those who suffered payment card fraud was up, from $387 to $631.
  • Resolving an identity fraud problem took five hours longer, from 21 hours to 26 hours.
  • Credit card fraud accounted for less of the total number of cases (57 percent) than the previous year, but debit-card fraud was up from 26 percent to 36 percent.
  • Nearly 14 percent of the identity theft cases were by family members or acquaintances but the amount stole by them was nearly twice the average--$8,233.

Researchers credited the overall decline to the payment card industry's new data-security standards, but noted that the fraud rate seems to decline when retail sales go up but rises when sales drop.

The decline in the 2010 fraud rate contrasts with the 12 percent jump it experienced between 2008 and 2009.

Although some fraud cases cost consumers up to $50,000, the lion's share of the cost is covered by banks and merchants. The amount of time it took to resolve identify fraud in 2008 was more than 30 hours.

Posted in: Miscellaneous

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New "Saver" reverse mortgage offers lower borrowing costs

February 11, 2011

By MoneyRates Team | Money Rates Columnist

Although reverse mortgages--getting the bank to pay you when you're 62 or older for the equity you've built up in your home--have always sounded like a great idea, the high fees have often discouraged people from taking advantage of them. They figure it's cheaper to live off of their money market accounts or savings accounts.

The Wall Street Journal reported recently that this may be changing since the advent last year of the Federal Housing Administration's "Saver" reverse mortgage, which reduces some of the upfront fees by about 40 percent.

What is a reverse mortgage?

A reverse mortgage allows a homeowner to receive a lump sum, line of credit or monthly payments up to the value of the equity in their home. The mortgage isn't due until the client dies, moves, sells or defaults on property tax or insurance. Among the upfront charges, which can approach 5 percent of the home's total value, is a mortgage insurance premium of about 2 percent of the property's value.

But the Saver mortgage from the FHA, which insures most reverse mortgages, has cut that premium to 0.01 percent in return for allowing borrowers to take out only 80 to 90 percent of what they might have gotten from a traditional reverse mortgage. Banks and other lenders are also reducing many of the fees and the interest rates they charge on reverse mortgages.

How the reverse mortgage is used

Although most reverse mortgages are used to cover a retiree's long-term medical expenses, some borrowers are taking them out because they want to protect their other investments, which are performing better than the housing market. And the interest rates on reverse mortgages are cheaper in some cases than home equity credit lines.

Nevertheless, it may take a while before you can recover your upfront costs, so plan to stay in your home for a while until you've recouped those expenses.

If you're wondering if a reverse mortgage or a Saver mortgage is right for you, you should consult a reverse-mortgage counselor approved by the U.S. Department of Housing and Urban Development at 800-569-4287.

Posted in: Mortgage

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