Odd Financial Situation I'm In

Folks-
It's hard for me to believe that it's been over a month since I've updated this blog. In that time I've been entering a diary over at The Daily Kos, mostly because most of those entries fit better there, but also because more people check out my entries there. I will, for now, continue to update my blog here, but I will also continue to evaluate my using this blog from time to time.

Now, here's my most recent entry. It's also probably my most personal one.
I’m going to do something I haven’t done before. I’m going to open up about my current financial situation. The main reason I’m going to open up here is because in all of my years, I find myself in a bizarre situation that I haven’t ever been told to expect.

Whenever I’ve committed thoughts to keyboard, I’ve always held back a little bit from my private life, which I understand includes ones financial life as well. I’ve not understood why this should be the case, since politicians and celebrities seem to have so little financial privacy, but I’ve held back in order to protect those around me from some… unknown, unseen, possibly legal liabilities.

So, with no further beating around the bush, here’s the background of my situation. Like many Real Estate Agents in the last few years, I got duped into taking one of those toxic loans out in order to buy a nice new home that I should have known I wouldn’t be able to afford once the loan recast. I can’t really remember the reasons why I would do something that seems so dumb in hindsight, but I’m betting the banks are thinking the exact same thing right now, only from the other side (“Why did it seem like such a good idea to loan money to people while making such a point to make sure we knew nothing about their finances?”)

So, about a year ago, under mounting financial debt and looking at a home value about 2/3 what we paid, we looked at our choices. We could file for bankruptcy, go through credit counseling, have the counselors tell the judge that we couldn’t pay the debt, have the court auction off everything, etc., or try something else. The something else that seemed most honorable to us was to pay off our credit cards, which in hindsight seems like the best thing we could do (Citibank recently increased their lowest credit card interest rate to over 20%!) while negotiating with our mortgage company in order to see if we could change the terms of our mortgage.

I’m going to do something I really didn’t want to do at this point: Name the bank. I think you’ll understand why later. To the credit of Indymac Federal Bank, even while they were going through all of their problems, they kept working with us. At least they did until last September. They asked us to get our financial information together for them and call them back with the information. I got the information, just as they asked, and called them back at the number they gave me, and ended up leaving them a voice-mail message. Next day, I left them another one. I waited a few days, called them back, and left another voice mail message. Then I did the same the next week. The week after that, I did the same thing. No replies came. No calls, no letters, no emails, no faxes, nothing. I called again the next week. I kept this up until around the middle of October, figuring they were backlogged, and would get back to me when they had the time.

Then came mid December. I got a letter from Indymac telling me I owed them roughly half of our joint household income by January 19th, or they would start foreclosure proceedings. I called them back at the number provided…and left them a voice mail message. And another one. Same thing the next week.

I figured it was time to up-the-ante, so I contacted my Congresswoman’s office and left a voice mail for her assistant who handles these things…and got no response.

So last week, we contacted a company that supposedly will negotiate with our mortgage company for an up-front fee, and I was going to go with them until I went to the California Attorney General’s webpage and found out that it was illegal for them to take a fee from us until after they had provided the services. Yesterday I called Indymac and after leaving my voice mail message in disgust, I called the Consumer Credit Counseling Service in my area, as suggested by the AG’s office, and was surprised to hear only confusion on their end. They suggested that I try to find a branch of Indymac and go in and talk to them, even though there are no branches in my area (in fact, the nearest branch is an 8 hour drive away). That was their best suggestion after a roughly 20 second phone call. No service from them was suggested or provided to this consumer regarding credit or counseling, so I’d say they failed completely.

To me, this is a bizarre situation. In my experience, and in all of the classes I’ve taken from high-school on, I’ve been told that the person who is owed money is the one that constantly tries to contact the person who owes them money. This is completely the opposite of my current situation. I’ve been calling them for MONTHS, and I haven’t even gotten any kind of confirmation that I’ve contacted them. I feel like I’m hounding them. I imagine them cowering in some room someplace, saying “Don’t answer the door, that guy owes me money!” It’s nuts. We hear all the time that if you’re in financial trouble that the worst thing to do is to stop talking to your lenders. That’s not my problem. They have stopped talking to me, even before we could talk about a possible solution! Is this the Indymac Federal Bank who was supposed to be a model of working things out with their customers, as was reported just a few months ago?

I hate to say it, but the real feeling I have is that this problem is so large for these people that they actually have no idea how to tackle it. Indymac can’t figure out what they can do, Congress can’t figure out what they should do, and the CCCS doesn’t know who they are, what day it is, or remember how they got to work (“What’s that ringing thing? What happens if I pick this thing up?”) The problem of foreclosures has gotten so huge that they are unable to figure a way out, and have decided to simply shut-down all thought and hope the automatic systems take care of the problem, or that by some miracle, it simply vanishes; the nightmare over with the dawning of a beautiful new day. Unfortunately, the dawning morning is the dream, and the financial crisis is real.

My family and I would like to keep the house, but we have completely lost our investment in it. The question is: “Should I keep plunging money into an investment that is currently, and probably always will have a negative return on my investment?” The businessman in me says no. Any further investment is money lost, unless Indymac can reduce our payments to a reasonable level. No offense intended, but that’s the right business decision. However, this is about family. If I could work out something else, I would, but it’s going to require Indymac to at least return my phone calls. The question for them is: “Do you want to definitely lose 2/3 of your investment, or find some way to lose ¼ or less (or possibly nothing, but no more than 2/3)?” Their current actions say they would rather definitely lose big than risk losing small. They know where I live and have all of my contact phone numbers.

I would love to hear from other people. Do you have any suggestions on what to do next? Are you in or have you been in a similar situation? Do you work at Indymac and know what is happening? I’m completely at a loss, and for once in my life, I have no idea what to do next.

A Solution to the Current Financial Meltdown

By Ed Smallwood

Folks-

We’re hearing a lot of talk about the bail-out of the financial companies on Wall Street. Both parties are weighing in, with most people (more than 70% of those polled) skeptical that giving almost a Billion Dollars of money without oversight to one person to dole out to the companies is a terribly good idea. The President and John McCain seem to be okay with it. Republican Representative Joe Barton from Texas (who voted with the President 96% of the time) called the bill “Dead on Arrival,” and stated that the bill “doesn’t have 40 votes in the House,” so someone is listening.

This is my take on the situation:

We are right to be skeptical. The way the bail-out has been architected, the executives of the companies are likely to keep their jobs and fat bonuses. The government will take a chunk of the shares in the company, diluting the value of the remaining shares and shafting the shareholders if the company recovers. It does nothing for the homeowners whose failing loans are causing the financial debacle in the first place. In short: The heck with your retirement or your home. What’s really important is saving rich people’s butts! Understand?

The really huge problem with this is that we are likely to see as much as (possibly more than) Seven Billion Dollars in losses through the mortgage meltdown. That’s Seven Billion Dollars in lost home equity. To put it another way, that’s more than half of the U.S. Gross Domestic Product. Imagine if your gross salary suddenly got divided in half for a year without changing any of your other obligations. That’s what we’re talking about happening to the economy of the U.S. And that’s not counting the amount of money that people put into their home and lost due to the home being foreclosed on.

Now imagine that the current bail-out doesn’t address any of the problems with the mortgage meltdown. Why imagine? It doesn’t. None of this money, not one single cent, is slated to reduce the damage to homeowners’ pockets. All the legislation does is make sure the mortgage company is still there to foreclose on the homes if need be.

Now, keep in mind that while that’s not good, the current bill also does nothing whatsoever to address the bad mortgage making decisions that got us into this problem. Nope, repealing Phil Gramm’s deregulation of the industry is not currently on the table.

So, here’s the deal: Executives keep their jobs, retirement savings invested in mutual funds get smaller, homeowners are out on the street, and taxpayers are left holding the tab. If that isn’t a Bush/McCain field goal, I don’t know one.

Here’s what we need to really be doing:

First, we need to bring back confidence in our financial institutions. Simply making sure that they continue to exist isn’t that helpful if they aren’t doing their jobs. That means they have to be lending money out to people who can afford it and collecting that money accordingly. In order to make sure they are doing their job we absolutely must at a minimum bring back the old regulations by repealing Phil Gramm’s (architect of McCain’s economic policy) deregulation bill. Creating a few new regulations might be useful as well, as long as they prevent this kind of mindless money grab.

However, that is nowhere near enough. We should also have the FDIC and SEC swoop in on banks and mortgage companies after closing on some Fridays for unscheduled audits that would take the entire weekend. Go over these institutions completely and with a fine-toothed comb. Then on the following Monday morning if the company doesn’t pass the audit, the government takes them over. If they do, then the FDIC or SEC should make a nice, loud public statement that the company is financially sound and ready to continue business.

That helps bring back confidence in our financial institutions, but doesn’t help the real backbone of our economy. In order to fix that, we’re going to have to relieve the homeowners of some of their burden. This is going to be hard and involved. My recommendation is to do something similar to the audit of the banks themselves. We’re going to have to freeze foreclosures for a time. Before foreclosing on a property, a financial institution will have to do the following: Attempt to contact the homeowner and offer to meet with them. This should be first attempted through the mail, followed by phone calls, and then home visits if necessary. The mortgage companies would not be able to foreclose on the property if they couldn’t prove that they had done this. If the homeowner agrees to a meeting, then they would meet at a neutral location with the mortgage company and a neutral mediator.

At the meeting, the mortgage company would have to present an honest assessment of the current value of the property, as well as the amount owed on the property. The homeowner would present documents showing their income as well as their financial liabilities. It is likely in many cases that the homeowner would not be able to pay back the entire amount of the loan. It’s probable that in many areas the home could not be sold for more than the loan amount for a decade or more. The mortgage company is going to have to take a loss in these cases. But, we can mitigate the loss if we’re careful. The loan must be restructured so that the payments are affordable and not for less than the reassessed value of the property, but if the homeowner sells for more than the loan’s restructured value for up to some specified time (I would say up to 10 years after the life of the loan would be reasonable), the mortgage company should be entitled to a portion (not most or all) of the profits up to the original value of the loan. This money going to the mortgage company would be used to offset any bailout funds given to the mortgage company by the government, and buy back shares in the company from the government, helping to keep shareholder equity. Any financial institution unwilling to do this should be excluded from bailout funds.

This idea has the merit of helping to free up funds for the homeowners to spend or invest and keep our economy afloat, while protecting shareholder value. However, in order for this plan to work it will have to be heavily promoted. It will do nothing if people don’t know about it. Is this idea perfect? No, it doesn’t really punish those who were greedy enough to get us in this mess. Is it simple? No, but the simple solution was to prevent this problem in the first place (and it was clearly preventable.) However, it is the best we can probably do at this point, and it would probably be enough to prevent a serious recession.

Anyone in Congress who wants to steal this idea and elaborate on it is very much welcome to do so.

The Current Financial Situation, and Some Solutions

By Ed Smallwood

Yesterday I was watching CNN. Connecticut Democratic Senator Chris Dodd was being interviewed, I can’t remember who it was that was asking the questions. What stuck out in the interview was what he said about a closed-door briefing the Senate got from Federal Reserve Chairman Ben Bernanke. He wouldn’t comment on the exact content, after all it wouldn’t be terribly useful to keep the information in a closed-door briefing if it was all going to become public immediately afterward. What Senator Dodd said was that after Mr. Bernanke was done talking, there was stunned silence for 10-15 seconds in the room.

That’s significant. It’s also very frightening, either way you look at it.
I have known for some time that things were going very wrong with the economy. I remember an interview last March with Paul Krugman in Fortune magazine where he said that he thought we would hit 6-7 Trillion Dollars in capital losses in the housing industry this year, a 25% reduction in equity throughout the United States. That is what we are just beginning to see right now. Congress is talking about an 800 Billion Dollar bailout. You can see that what Congress is talking about is roughly an order of magnitude too small to cover what Paul Krugman was talking about. In short, 88% of the losses aren’t being addressed by Congress.

Now, we also have to take into account that the International Monetary Fund is estimating our GDP at roughly 13 Trillion Dollars. The losses we are talking about are more than half of the Gross Domestic Product of the entire United States. Nobody alive has ever faced a financial disaster of this magnitude.

Is that what Chairman Ben Bernanke was telling the Senators in that closed-door briefing? Numbers so large that it stunned veteran Senators into silence? I think that’s exactly what happened.

Here’s the real problem: The simple answer to this problem was to avoid deregulating the banking industry in the first place. Don’t let this debacle happen. Unfortunately several years ago the “Regulation is Bad for the Economy” branch of the Republican party got it’s way, with Senator John McCain cheering it on. The easy and simple answers to this problem are all gone now. There is no choice but to see our economy slide downward. It’s simply too late to prevent that.

So, what do we do now?

We’re going to have to bail out Wall Street. We don’t have a choice about this. That’s what Congress is doing to some extent now. The problem with how they are doing it is that they are diluting the shares that investors have by taking majority stakes of the companies they are bailing out and putting it under Government control. They are allowing the investors a chance to keep some of the value, but not most of it. This is unlikely to work in the long term. People’s retirement savings are going to suffer, even though it isn’t as much as they could. In short, the government is bailing out the executives of the companies more than the investors.

The landscape for homeowners is even bleaker. Nothing whatsoever has been done to address their concerns. Foreclosures are happening at an even greater pace than before. More properties are going “upside down” in value than they were before, and the Santa Clara County Association of REALTORS is estimating that this will be the case until at least 2010. Some estimates I have been reading put it at 2012 or later.

Now, with it harder than ever to declare bankruptcy (thank you Republicans,) and savings evaporating, the backbone of the American Economy, the Consumer, has almost no money to buy anything. We can see this through the fact that spending is decreasing while savings are simultaneously decreasing. Until something is done to address the concerns of the average person on the street, the economy can do nothing but spiral downward at an ever increasing rate.

This is where we stand now.

What are we going to have to do?

We are going to have to make peace with the fact that our economy is going to crash first of all. We can’t prevent it. Next, we have to do what we can to prevent it from crashing so bad that it can’t recover. This is a real possibility. There is nothing magical about the economy of the United States. Other countries in a similar state that did nothing saw their economies die outright. Most of them are third-world countries now, or failed states. That’s the danger.

We have to bring back the regulations that prevented this problem from happening decades ago. This is an absolute must. Doing any less than this means that nobody will trust banks enough to loan them money to make loans. That’s how the system works. Without that key part the system collapses and doesn’t recover.

We have to protect the money of the average person as much as possible right now. We can’t expect someone to pay back a bad mortgage at an ever increasing rate for the rest of their lives, tying up their spending power in servicing bad debt just because some company got greedy. If these homeowners decide to allow the banks to foreclose, they will find it harder to buy another home later. The inventory of foreclosed homes will increase, because there will be fewer qualified buyers (you can’t have a foreclosure in at least the last 2 years to qualify for a home loan). This is dangerous in several ways. First, unoccupied homes bring down property values. Second, they are fire dangers. Houses are fuel. If you have enough of them you can end up with a wildfire in the middle of a city. Oakland can tell you why this is bad.

This means we have to do at least one of two things, probably both: we will have to forgive at least part of the bad debt to keep people in their homes, or we will have to allow people with foreclosures on their record to get credit anyway. The former is preferable, and while the FHA is doing this to a small extent, the program needs to be massively expanded. The latter solution will probably have to be put into effect as well. Why should we do this? Why not let the people who took out these loans just hang? If we allow our spite to get ahead of our pity (or self interest), making sure these people pay back their loans, our economy suffers from having too little money left over to buy the things that we sell. All of us suffer if we make any one segment of the population suffer too much.

In addition, we really need to start working on our infrastructure, and I don’t mean just roads, bridges, ports, electricity grid, and communications grid. I mean the workforce as well. For most of my life we have seen a growing battle against the workforce. McCain’t has been talking a big game over how strong our workforce is, but the reality is he has actively been working on weakening it.

The big secret that allows the American economy to be so strong has been our educational system. Public education was invented here. We have expanded it ever sense the Brotherhood of Friends (often referred to as “The Quakers”) introduced the concept. All of my life the Republican Party has been trying to weaken it. Vouchers. Increasing tuition in Universities. Destruction of vocational schools. Even “No Child Left Behind” which is decreasing Federal funding to elementary schools. Recently when Democrats tried to bring back full tuition for all Iraq War Veterans, McCain’t voted against it. He said it would reduce the incentive for our Servicepeople to reenlist. This attitude is going to prevent our economy from recovering.

We need a top of the line communications grid to allow educated people to build products using electricity that will be shipped to the consumer through working ports and over working roads and bridges. If any one of those things isn’t working, our economy dies and stays that way.

Why wouldn’t our economy recover? Really, why would it? People with money are under no obligation to invest it in our country. If our economy is wrecked, they would be dumb to put good money after bad. They’ll invest it elsewhere, in economies that are booming. China is a good example. With no money being invested in our country, no educated people to design new products or services, a 20th century communications grid expected to help them design them, no energy to build them, and deteriorating ports, roads, and bridges to ship them our economy will stay sunk.

What we really need to get us through this crisis is a leader that believes in our future, not one that is trying to bring us back to a failed past, namely the “Roaring ‘20s.” Let’s all make sure we work toward our country’s future.

Links:

Fortune Magazine interview with Paul Krugman: March 17th, 2008 by Jia Lynn Yang http://money.cnn.com/2008/03/14/news/economy/krugman_subprime.fortune/index.htm