Personal Finance Blog By MoneyRates - June 2011
June 29, 2011
A second major U.S. bank has decided to stop originating reverse mortgages, saying that declining home values and the banks' inability to assess the financial condition of borrowers make the loans too risky.
Wells Fargo, the biggest issuer of reverse mortgages, joined Bank of America, which exited the reverse mortgage business in February.
Wells Fargo said it would continue to administer previously approved reverse mortgages and would continue make other types of home-equity loans to seniors. According to Reuters news service, Wells Fargo made 25 percent of all reverse mortgage loans last year. The New York Times reported that more than 50,000 reverse mortgages totaling $12.6 billion were made since October 2010.
What a reverse mortgage can do for you
Reverse mortgages are a type of home equity loan for homeowners 62 years of age or older. A bank makes monthly payments to the homeowner against equity they have built up in their home, and the loan, with interest, is due when the borrower dies, sells the house or is no longer able to pay property taxes or homeowner's insurance.
Reverse mortgage decline a symptom of current economics
Wells Fargo and Bank of America's departure from reverse mortgages is another grim sign of the declining value of homes in America. Despite low current mortgage rates and refinance rates, housing sales and prices have been falling steadily since 2007, and foreclosures continue to pile up. The situation has put many homeowners in a position of owing more on their homes than the homes are worth.
According to Bloomberg news service, home prices slid 3.6 percent in the first quarter of 2011--despite current mortgage rates that remain low--and are now at their lowest level since 2003. Wells blamed this "unpredictable home values" for its decision to abandon the reverse mortgage market, Bloomberg noted.
Even with declining home values that caused reverse mortgage demand to decline in many states, some areas are experiencing a surge in demand for the loans. One example is Texas, where the senior population is growing and home values have actually increased in recent years.
Posted in: Mortgage
June 28, 2011
Exchange-traded funds, low-fee funds that are becoming popular investments, have been making their way into 401(k) retirement savings accounts.
ETFs are like index mutual funds in that they can be passively managed to track major market indexes. But unlike index funds, they can be bought and sold like stocks throughout the day, rather than at the end of the day after markets shut down.
The arrival of ETFs are good news for those using 401(k) to build their retirement savings accounts and are concerned about high fees and expenses related to those accounts.
Hidden costs of 401(k) plans
According to National Public Radio, the hidden expenses in 401(k) savings accounts can be as much as $1,500 annually for a 401(k) with a $100,000 balance. That's why some investors choose instead to put money into money market accounts or certificates of deposits. Even though the interest rates for the best cd rates and best savings accounts are at a historic low, they are relatively risk-free investments.
Although federal law requires that 401(k) fees must be "reasonable," NPR noted that many investors don't have a point of reference to help them determine if their fees are high.
The New York Times finance columnist Ron Lieber told NPR that those fees should be less than 1 percent but some are as high as 1.5 percent.
New 401(k) disclosures
Starting in January 2012, the Labor Department will require employers fully disclose the fees charged to 401(k) savings accounts. According to NPR, this will make it easier for the 72 million Americans with 401(k) savings plans to compare investment options.
The new rules will also require that the plans provide more detail about the performance of various mutual funds offered as investments.
Among those funds will be an increasing number of the ETFs. According to USNews.com, 401(k) plans had $2.7 billion in ETFs at the end of 2009, still a small fraction of the $4.5 trillion in 401(k)s and other defined contribution plans.
But the ETFs are appealing in that their management fees typically are less than 0.15 percent. This, USNews.com noted, could have a big impact on how much people can keep in their savings accounts; paying an extra percentage point in fees cuts a sixth of total retirement savings in 20 years.
USNews.com also noted that passively managed funds, like ETFs, have been more successful than many actively managed funds that charge much higher fees.
Posted in: Retirement
June 27, 2011
Late last week, the U.S. government announced the unusual move of releasing some of the nation's strategic petroleum reserves. While the move and its timing have raised some eyebrows, people with savings accounts and other deposits could benefit from the move in a couple of ways.
Strategic petroleum reserves
The United States keeps 727 million barrels of oil in reserve to protect the country against situations which restrict the supply of oil. This reserve is rarely tapped, with the last occasion being the aftermath of Hurricane Katrina, which saw oil production from the Gulf of Mexico disrupted.
The latest release of these reserves will entail some 30 million barrels of oil from the U.S. emergency supply, or about 4 percent of the reserve. The move is part of a coordinated effort by the U.S. and other nations to release a total of 60 million barrels of oil to counteract supply disruptions in Libya and Yemen.
The release of strategic petroleum reserves is unusual in its own right, but the timing of the decision makes it seem even more curious. Oil prices had already been trending downward in recent weeks. Also, according to the U.S. Energy Information Administration, America's supply of oil and petroleum products was already higher than the levels over most of the past twenty years.
The odd timing can perhaps be explained by the fact that the coordinated, multi-nation release of reserves is reported to have been the outcome of behind-the-scenes negotiations which took weeks to bear fruit. In other words, the timing may say more about the grinding pace of international diplomacy than anything else.
Impact on savings accounts
So what does this mean for savings accounts? With CD, savings, and money market rates at record low levels, any economic stimulus could potentially get rates moving back upward. Lowering oil prices may have such a stimulative effect.
At the very least, lower oil prices could take the edge off of inflation - welcome news at a time when, CD, savings, and money market rates provide little protection against rising prices.
Posted in: Savings Accounts
June 24, 2011
A growing number of Americans who use prepaid debit cards in lieu of a checking account could soon be slammed with fees over and above the already hefty levies they carry.
Fee hike on the horizon for prepaid cards?
According to the Associated Press, prepaid debit card companies are expected to hike fees on the cards in July, 2011 when they are forced to lower the swipe fees they currently charge retailers. Those fees--also called interchange fees--are expected to be lowered in July by the Federal Reserve Bank in response to new banking rules passed by Congress.
Although prepaid card users were supposed to be exempt from the fees, AP says those limitations could take a year to enact. In the meantime, fees are expected to go up by as much as $220 a year for some prepaid card users--on top of the various fees already charged to them.
Most prepaid debit card users are lower-income consumers who have decided to forgo a checking account, savings accounts or an online savings account with a traditional bank because of the fees banks charge for those services. Many others use the cards as savings accounts or budgeting devices; once the money on the card runs out, the cardholder can't use it anymore and thus avoids overdraft fees associated with a traditional checking account
Prepaid cards increasingly popular with consumers
According to AP, the cards are becoming increasingly popular; $288 billion is expected to be loaded onto prepaid cards by 2014, up from the $140 billion consumers spent on cards in 2009. Some employers are now paying employees with prepaid cards, and the IRS issued tax refunds to 600,000 people this year with prepaid cards.
American Express became the first big-name financial institution to issue its own prepaid debit card recently. According to USA Today, the new card has fewer fees than other prepaid cards, which typically charge you every time you reload the card or make a withdrawal from an ATM. Prepaid cards, unlike credit cards or debit cards linked to a checking or money market account, lack federal protections when the card is lost or stolen.
Posted in: Credit Cards
June 22, 2011
Looking for higher savings account rates? The answer is clear - look at online banks.
A new study by MoneyRates.com suggests there is a significant difference between traditional savings accounts and their online counterparts.
The evidence is in
According to the FDIC, the average rate on savings accounts nationally slipped yet again this week, to a new low of 0.14 percent. MoneyRates.com found much the same thing when it surveyed a sample of large and mid-sized banks earlier this month. Savings accounts from traditional banks averaged either 0.15 percent or 0.16 percent, depending on the account size.
Online savings accounts, however, presented a markedly different picture. With these accounts, MoneyRates.com found average rates ranging between 0.76 percent to 0.87 percent, again depending upon account size. The top ten online savings accounts all offered rates above 1 percent for balances of $10,000 or more, and even with a $1 balance you could find a number of choices with rates above 1 percent.
A difference of about 1 percent between the top online rates and the national average would be significant under any circumstances, but it takes on added resonance in today's low rate environment. It means that on average, you can do more than five times better with an online account, and the best online savings accounts offer rates more than seven times the national average.
These rate differences are significant, but is there reason to believe they are sustainable? That is, are these numbers a statistical fluke, or should you expect that online banks will have an ongoing advantage?
There are two things that suggest a systematic advantage for online banks:
- On the whole, online banks are newer than their traditional counterparts. This means, they were less damaged by the financial crisis, and have had an easier time adjusting to recent financial legislation. As a result, rather than being in a defensive, consolidation mode, they are assertively seeking new deposits.
- Online banks require lower overhead than a traditional branch system, which helps them offer higher rates.
In short, the evidence is in: online banks should be part of your search for higher rates.
Posted in: Personal Finance