Free and clear

The Thinker by Rodin

Protestors on Wall Street and elsewhere are occupying spots in major cities, trying to make the top one percent acknowledge the ninety nine percent. Many are without jobs. Those with jobs may have taken pay cuts, or were forced to go part time, or were required to contribute more toward health care or retirement. Many of those protestors also carry the burden of underwater mortgages. Others are saddled with burdensome student debt.

They are the unemployed, the underemployed, the over leveraged, the disenfranchised and the generally pissed off. If you are one of them, at a certain point you might as well pitch a tent in Zucotti Park. The weather may be too hot or too cold. You may have to wait in a line at McDonalds at 3 AM to use a toilet. You may suffer from insomnia from the din of a city that never sleeps and smell like a bus depot. But at least you are in the presence of fellow compatriots. You have known relentless misery, you are knowing more misery but at least you can talk with someone who really understands. And once a day or so you can shout out your lungs at the largely tone-deaf moneyed class who might, if the weather is nice, toast you with champagne from the balcony of the New York Stock Exchange.

Mortgage rates are at record lows, but little good this does someone who is underwater on their mortgage. Because they had the flawed judgment to misjudge the future, they are no longer credit worthy, so certainly no respectable lender is going to let them renegotiate their mortgage. The Sword of Damocles shall always be pressed against their chests. No, only good people, really special people, i.e. those with actual equity in their house and good jobs get to refinance their mortgages at crazy low interest rates. In that sense, maybe I am one of the one percent.

No, not really. Our income is not that lofty. We’d need $343,927 in adjusted gross income to fall into that bracket. We’re not quite in the top five percent either. We’d need $154,653 in AGI to qualify. We come close though, so we are definitely in the top ten percent, which is good enough for many of us with mortgages to get one of those sweet refinance deals. Unlike those with underwater mortgages, our property had about twenty years to mostly appreciate, so that when prices finally fell we still had plenty of equity. Plus, over nearly two decades we have chipped away at our house’s principle. The current balance on our mortgage is $64,211.24. We paid $191,000 for the house in 1993 and took a mortgage for $171,900 of the amount. It was not until two years ago that we managed to get the balance below $100,000.

Despite our current 6.875% interest rate, our credit union is still happy to refinance the balance of our mortgage, if we don’t mind giving them $2581 in various fees for the privilege. In exchange they will pay off our 30-year mortgage and give us a new 10-year mortgage at 2.875%. We should save $372 a month in interest, once we pay off the fees, which will take about seven months.

As for those of you with underwater mortgages, sorry, you are largely out of luck. I’d like to say we possessed some sort of genius, buying low in good neighborhoods but the truth was we were just lucky. My wife and I could easily have been underwater on our mortgage too. By chance and perhaps date of birth we rolled double sixes.

Please don’t be angry with us. Yet there must be some sort of element of unfairness here. Someone must be getting shafted when we start accumulating $372 more a month. Rest assured that just like the brokers on Wall Street this extra income will be unearned. I did not have to take a part time job at a Wal-Mart to bring home this extra bacon. I just had to fill out some papers, tidy up the house for the real estate appraiser and endure yet another loan closing ceremony. This will be our fourth, since we first owned a townhouse and already refinanced once. The only deficiency to our refinanced loan is that I will have less mortgage interest to write off on my taxes. Still, I would rather pay more taxes than pay a lender extra interest. Perhaps some of it will trickle down to some of you. I would not hold your breath. I don’t plan to hire a gardener, and I already got a service that mows the grass.

Granted, owning a house comes with all sorts of other expenses not factored into the principle, interest and escrow. The entire outside of our house with the exception of three doors has been replaced. Every appliance has been replaced, sometimes more than once. Still, I can remember the days when I was living on a marginal income and rented. Once a year like clockwork you could count on the rent being raised, generally well above the cost of living. Soon we will be paying less per month in principle and interest than we paid thirty years ago per month when we lived in an apartment. It makes no sense. Meanwhile, as the downsized give up houses and end up back in apartments, extra demand is making rents go up. This crazy disparity makes no sense to me. It probably does to a Republican like Herman Cain. After all, they are loooosers.

The day is not that far off (I am hoping less than five years) when we will make that final mortgage payment. Then there will be no more mortgage payments ever. We will own the house, not to mention our cars, free and clear. Moreover, for the first time since I was age twenty or so I will be able to honestly say that I won’t owe anyone a dime. I can lay down the heavy burden of debt from my shoulders at last. I plan a party on that day, and drinking a lot of expensive champagne. I might even get drunk.

Being free of debt won’t mean our lives will be free, of course. I don’t know what I will do with all that extra money every month. Perhaps with my decent pension and retirement saving I will truly retire and never work another day in my life. Perhaps it will get eaten up in ever more egregious health care premiums or long-term care insurance. For a while though I hope I can at least revel in being free from the burden of debt.

Perhaps I will pitch a tent in Zucotti Park.

The Fed giveth and the Fed taketh

The Thinker by Rodin

There are times when I tend to agree with Rep. Ron Paul (R-TX), the libertarian who argues that we should abolish the Federal Reserve. Granted, we created it to avoid banking crises in general (though it didn’t seem to stop the 2008 crash) and to even out the economic cycles for the American people. Of course, the big newsworthy thing that the Fed does is it sets interest rates. It has made interest rates so artificially low for so long that a lot of people are taking it on the chin. Others, principally well-capitalized debtors like me, stand to benefit from these artificially low interest rates.

Rates are low to stimulate the economy, or so Fed thinking goes. I have to wonder whether if rates were a few points higher the economy would really be that worse off, because our “recovery” is anemic at best. On the other hand, if interest rates were a few points higher, perhaps people would be more enthusiastic about putting money into savings, money market funds and CDs, spurred on by the higher rates of return for these relatively safe investments. Right now, due to inflation, savers are effectively losing money. While protected from large swings in the value of their capital, they are doing so at the cost of losing money on the deal or, at best, coming slightly above inflation.

Of course, the Fed is doing this deliberately. They want you to feel the pain of low interest rates so you will invest money in riskier endeavors instead, like stocks, bonds and mutual funds. This is based on the theory there that growth must come from the corporate world. Until recently many investors were happy to do so until, as I predicted, they finally woke up and realized their investments were way overvalued. This caused markets to decline precipitously and for investors to seek safety in U.S. Treasury Bills, now downgraded by Standard & Poors to AA+, but still good enough for Wall Street. Wisdom on Wall Street is now that it is better to lose a little bit of money by investing in Uncle Sam than a whole lot of money on a turbulent economy with few prospects of short-term gains.

In any economy there are going to be winners and losers. By deciding which cards it was going to play, the Fed has effectively picked winners and losers. In particular, it has disenfranchised savers. Specifically, senior citizens now are taking it on the chin, at least the smart ones. Those senior citizens who followed the typical strategy of selling stocks and mutual funds as they close in on retirement and using the proceeds to buy low risk CDs, Treasury Bills and the like have discovered their expectation of a reasonable income from interest on “safe” securities means essentially no interest on them, which means those investments really are not a good investment.

Many retired couples anticipated hundreds of dollars a month in interest income off these “safe” securities, figuring the interest would help pay some bills in their old age. Without the income, the Fed has essentially lowered their standard of living. Essentially they are paying the price so that five years ago brokerages could write shoddy homes loans. Effectively, we transferred wealth from prudent savers to reckless corporations in the shoddy mortgage writing business.

It is true that when these seniors sold their stocks and funds to buy these securities, they essentially locked in the gains for these investments made over many years. However, many seniors, particularly the well-capitalized ones, were hoping to live off the interest of these securities and keep the principle to pass it on to relatives. Instead, they are drawing down their savings to live, and at a greater rate than they anticipated. It’s a wonder they do not go down to the Fed en masse to protest, because arguably they are getting shafted. Long-standing economic rules were pulled like a rug from under their feet.

Americans in general are paying down debt and stuffing money in savings, but they too are getting shafted. Because of inflation, they are also losing money on their savings, and saving money is supposed to be a virtue. While it will be nice to have a stash of ready capital on hand when future unplanned expenses come up, they will be penalized for the privilege. This is their reward for paying down their credit card balances? This is the reward for being prudent?

Who is winning with interest rates so cheap? You would think it would be small businesses, but with the economy so fragile, they are finding it hard to get loans. If they get them at all, unless their credit is sterling, they are probably paying more than they should because of the risky economy. Of course, these days larger corporations often don’t need to borrow any money. Their bank accounts are stuffed, thank you very much, because they have become so efficient from laying off people or getting their labor at a discount. Even though business is down, thanks to these efficiencies coming at the expense of others, profits are up. Many companies are taking advantage of their hordes of cash and sagging stock prices to buy up shares of their own company at a discount. That’s good for them, but arguably it does nothing to stimulate the economy.

The winners are also people like me who are well capitalized, have an asset with plenty of equity and a steady job. My financial adviser wants me to refinance our mortgage. It seemed sort of pointless to go through the expense with the balance down to about $66K. Moreover, we already refinanced it once before. Thanks to his badgering, I called the credit union today to run the numbers. I found I could turn my 30-year loan into a 10-year loan, drop my interest rate four percent for about $2300 in closing costs. The effect would to drop my monthly payment $400. Duh! I should have done this months ago! It’s great for me to effectively have another $4800 a year in unearned income a year. But even someone who never studied finance like me knows that borrowing money at a 2.875% is crazy and artificially low. I have to wonder if home loan interest rates will ever be this low again. I figure someone will get shafted by refinancing our home loan.

One thing is for sure: I am not stimulating the economy, except for making business for mortgage processors. Maybe I am shafting senior citizens from getting decent interest rates. All I know is with money so artificially cheap that I’d be a fool not to grab it. So maybe I want the Federal Reserve to survive after all, at least as long as I can stay a financial winner.

The turmoil in the markets also means that those with capital and a long-term vision should be bargain hunting in the stock market. Alas, as my mortgage indicates I am still a debtor, but if I had spare cash lying around I’d be buying undervalued stocks. Maybe once my mortgage payment is reduced $400 a month, I should invest the difference in stocks. The future is always impossible to predict, but it’s not hard to predict that interest rates will stay at rock bottom rates for years to come. It’s a pretty good bet that we have at least a few more years of a sour economy as well.