patrick.net

Bay Area is full of engineer-types, who are usually devoid of financial sense. It is going to take a while.

Heh, I'd imagine the "liberal-arts-types" would be devoid of financial sense.

So who's left then?

Allah v/s Randy is always an interesting debate ;-) In spite of the thankless job done by HARM as a translator there is still some communication gap.

I will add my own twist. I think the debate is about the term "savings". Buidling equity to me is not savings. It's "investment". The nominal value of the savings does not go down, but on investment, you can "potentially" loose everything. Presense or absence of inflation does not change this fact, it only changes the probability of this happening.

That does not mean one should not invest. Just that the risks are different. I think every mutual fund (including money market funds) take pain to express this - "you can loose your principal" thingy.

Re the CMG/CGM (the spelling alternates throughout the article ;)) accelerated mortgages, that lender has not operated in Australia to my knowledge, but many lenders were offering LOC mortgages in Oz for some years. My nominal g/f took a look at one of these about 3 years ago thru a MB and after some thought and possibly discussion with her cabal of mates, pointed out that it wasn't worth it, as the interest is higher (2% higher than ARM in the case of CMG). She's an auditor (and ex-tax auditor) so tends to find financial problems pretty quickly. LOCs seem to have been largely discredited every since as they were marketed unethically (surprise) and burnt a few people, I believe. Hence the 3 links pasted in from FIDO above -- to answer the thread question :)

They are [would be] a fantastic product IF you apply suitable discipline AND the interest rate is close enough to a regular mortgage.

except the former is a little unlikely and the latter is not the case :(

the whole thing about issuing a credit card on a LOC (or a CC at all) is to gouge people on interest at anywhere from 12-18%. the banks like to contribute to these pious news articles that say 1/3 of their CC customers pay off the full balance each month and never pay interest, but of course they're really hoping and praying ALL their customers will be in perpetual debt up to their necks at those rates, and rely heavily on those customers who don't pay them off, preferably for month after month...

ajh,

Thank you! That's the whole point. You don't have to make any "extra" payment! Most of us truly can't afford it. Banks work "the float" all day everyday, this is simply turning the tables. In that regard it really is nothing new.

Some have suggested, no insisted that a 15 year fixed AND making "extra" payments (I guess out of your trust fund) should more than negate any possible benefit of a mortgage accelerator. Fine. Do it. (This is if you live in Minot, North Dakota of course).

Folks, the problem is that you have effectively tied your own hands here. God forbid you get sick or one or both of you loses your job. Don't look for any brownie points from the lender if you fall behind on your payments. Imagine calling up and saying every year for the last 14 years I've signed my tax return, company bonus and bottle deposit returns over to you and and lived off of top ramen I have all this equity in my home! So I'm late 2 months after I lost both eyes in a tragic salt water taffy factory explosion!

Pffft. Guess what? Tough cookies pal.

Look, after everything that's transpired over the last several years I don't blame anyone for being skeptical. Even I am not 100% sold. There is much yet that needs to be determined. All I've ever said is that I bought way "pre-bubble" paid 130K, never missed a payment for 10 years and at the end of that time I owed 3K less than I originally borrowed. How's that grab ya?

And only a 155% increase in inventory! Let's face facts, FL is sliding into the ocean.

Allah,

Ric Edelman wrote about this scenario in his book, "The New Rules for Money" back in the 90's. Many people he said he was way out there. (In ways he is). In his example I believe he used employee A and employee B both working at the Caterpillar plant in IL.

One pours everything he can to pay down his mortgage and finds after the plant has mass lay-offs that what he thought was a "home equity loan" is actually a "job equity loan". Think about it, with no job, how are we going to pay back the loan?

reasonable points, DinOR -- the strongest selling point for LOCs seems to be that they are effectively an interest only loan with optional principal payments which are more 'forgiving' than standard P&I loans, which might benefit people whose incomes fluctuate heavily over time. but that seems to be their sole benefit over a regular mortgage, at least for regular people. the 2% interest premium means you may have to cough up, say, an extra $6,000 a year over a standard mortgage in interest payments, for a start. (for a $100K mortgage in detroit, on the other hand, you are looking at only $2k extra.)

people can consider this mortgage type if it suits their circumstances, but 1) it's complex, 2) it has been marketed as a kind of magic solution for everyone to pay their loan off quicker, but it seems the benefit is only minimal (or non-existent) when you take fees and interest into account.

regarding the caterpillar/taffy/car plant closing down, that's a risk everyone takes all the time when they take on a mortgage -- hence, the existence of mortgage insurance, income insurance, some emergency state benefits, and so on. the whole concept of mortgages has arisen from the understanding that people are willing to stay put and typically get a weekly paycheck which doesn't fluctuate much that they use to pay down the loan. when people relocate for employment reasons, they simply retire one mortgage and start another. plant closures and local recessions etc unfortunately add some spice into the mixture a la detroit. who ever said we weren't wage slaves with the mortgage as the substitute slavedriver?

(+ what happened to employee B? you didn't finish the story...)

p.s. you can also use a LOC loan as a substitute for a personal or small business loan at lower rates (but higher rates than a standard mortgage).

(how do these differ from a HELOC, by the way? aren't we really talking about using a HELOC as a 1st mortgage here?)

DS,

Basically it's the opposite of the tortoise and the hare? Employee B socks away tax refunds and "little wills" into a mutual fund and has all the options in the world after the plant closes. Including going back to school to learn something besides putting torque on lug nuts. Oh, and he was able to take vacations.

Where accelerator products are concerned I suppose it boils down to how much do you hate being a debt slave. Me no likey.

SFWoman,

Oh sure, and some folks do. The reason that most of us don't is b/c we fear the minute we do, the transmission on our car will fall out. The difference is in the financial architecture. A trad. mort. is a closed ended financial arrangement. Just b/c you chipped in an extra $100 or $1,000 doesn't reduce your "fixed" obligation the next month.

Most accelerator products have more flexibility. Again I realize the tutorials I offered earlier are overly simplified but they can and do work.

Where accelerator products are concerned I suppose it boils down to how much do you hate being a debt slave. Me no likey.

i don't think they necessarily will reduce your repayment time or amount, when you crunch the numbers at 2% higher interest -- that seems to be the trap. they will offer you flexibility, but you are only shaving a tiny bit off total repayments with the direct deposit of wages idea. as per my earlier post, the online calculator being used in Oz used a deliberately flawed comparison by making the interest rates equal, and ASIC made 100 lenders take the calculator engine down.

Ok, there are 52.18 weeks in a year, but it is assumed that you make a "monthly" mortgage, i.e., every 4 weeks. Ok just for fucking giggles what is four times 12? Oh, that's right, it's 48. Mortgage accelerator? Selling someone air. Oh, what's the matter fucked borrowers’ get a prepayment penalty loan? You pay ½ your monthly nut each biweekly paycheck and walla an extra payment off the principal. Shit I should get Wernher fucking von Braun on this one because one needs a fucking rocket Scientist to understand it. Are the greater unwashed really that fucking vapid that they don’t get this scam?

Jason, GO THE FUCK BACK TO OREGON! I kid I kid, welcome to the blog ;)

DS,

It's been my experience that most calulators available on line ARE flawed. I've yet to see a mortgage calculator account for far flung financial theories like uh..... taxes and insurance?

I can't say that I'm disappointed with the response this topic has received but to my knowledge today is the first many here had ever even heard of any type of accelerator program. All of a sudden every one is dog piling on this concept in an ugly way tugging at the first loose thread they can find. Someone mentions a new type of loan, one that might actually benefit the borrower and b/c it's "new" we've already concluded that it's just another way to shake down the consumer.

O.K. You win. Let's all go back to waiting for the other shoe to drop on the correction and sign up for the "30 to Life" program. I can't wait.

Surfer X,

That right, that figures. As soon as the rain starts the guy high tails it south! Need any help packing Jason?

X, as I mentioned earlier I tried to do a bi-weekly program in the early 90's. The technology just wasn't ther to support it. They withdrew money way before the dates there were supposed to and made a real mess of things. At the end of the day it amounted to ONE extra payment a year knocking off only about 6 years? There was no charge, then again there was no service.

I've always been obsessed w/ the notion of not having a mortgage payment and I've been willing to explore as many "dark alleys" as it took to find a program that permits and actually encourages just that.

no, the only reason i reject them is that my g/f looked at one several years ago (since they have been in Oz for some time) and worked out the catches, partly from listening to the grapevine. plus there were some media stories here about how some people ended up much worse off than on a regular mortgage as they'd been caught out by the spin, and ended up having LONGER to pay on their mortgages. finally, the ASIC (= SEC) website and its watchdog website FIDO also points out that the calculator actually cheats, as it does not include the extra 2% premium that the loan has over regular mortgages, which negates your saving -- that graph of the exponential curve collapsing in 15 years is actually a cheat. this was also included on the media expose. all in all, you may end up no better off with a more complex mortgage product, and may even be worse off. you may have to completely read between the lines on this one. according to FIDO, tho, you will only make a marginal gain with the daily interest calculation and putting all your salary into that bucket, cos of the higher interest offsetting the savings. IF the interest rate was the same as an ARM, and there were no extra fees, it would be a different story. i think surfer actually got it exactly and in the fewest words. am i wrong or am i wrong?

SFWoman Says:

> Does U-Haul have to pay people to drive back
> to exodus cities? It seems that no matter how
> well you were able to coordinate rentals a net
> outflow is an outflow.

U-Haul (and other rental firms) try and avoid paying people to drive empty trucks and trailers to exodus cities, but every now and then they have to.

The first time U-Haul had to pay people to drive empty U-Hauls “to” CA was in the early 90’s and it made the front page of the WSJ (since WWII U-Haul had been paying people to drive empty U-Hauls “from” CA).

I just had a déjà vu moment since it was not long after I read the WSJ article with the dot picture of a (white) family leaving S. Cal that the investment RE market really started to tank…

DinOR Says:

> Where accelerator products are concerned I
> suppose it boils down to how much do you
> hate being a debt slave. Me no likey.

Paying down a mortgage is a bad idea for most people since:

1. You don’t have to try real hard to beat the after tax savings you get from paying down a home loan.

2. If you need cash down the road you can liquidate investments, but may not be able to pull out home equity after paying a loan down (especially if you need the money because you lost your job).

I am no fan of debt, but I wouldn’t pay off a home loan until I had plenty of cash and investments giving me enough to live on without working (like my parents did when they finally paid off their home loan)…

Okay - so if you had followed my link to the UK loan - it has a calculator that would tell you how much you would save and also how many years it would take to pay off the loan and it tells you what fixed rate loan you would have to get in order to save the same amount! Mind you they don't have the government giving favorable treatment to mortgage interest over there.

The whole point of these loans is that you can draw on them if need be - as opposed to traditional loans.

I believe that the ones here might need a little time to mature though and may never offer such a good deal as some of the UK ones.

FAB,

I can see that, and I'll agree. I could pay a significant amount down and have a very nominal MP. The bottom line is that I'll have zip liquidity and few options. I see people make this mistake about once a week.

I'm glad you didn't drag out the MID. I hear that argument all the time. Especially from Oregonians who's logic goes something like this: "Sure we take it in the shorts on property taxes but I get to declare that against my Federal return". "Besides, I'd rather keep the money local" yada yada.

To me that's like saying "if I were in a wheel chair think of all the money I'd save on shoes!" Well, OK I suppose I can see having all that fluff in your schedule A but at my age (47) I'd just as soon be able to see the light at the end of the tunnel!

Good points all, I hope we can continue the exchange.

i'll paste in the text of the critique from ASIC, in the spirit of HaHa, altho Claire can't paste in her calculator in return :P

the big issue is 1) is this a mortgage accelerator product, or just 2) a more flexible product for people unable to make normal mortgage payments? it's unfair to market it as an accelerator if it ain't... (it's a bit like the groupies who still admire james frey -- "OK, so it's all fiction, but it just made me think, and i really like the guy, and it was on oprah!")

"The Australian Securities and Investment Commission (ASIC) has acted to close down loan calculators on more than 100 websites of Australian financial institutions, including banks, credit unions, other lenders and finance brokers.

The calculators suggested that using a line of credit will result in the consumer paying off their home loan more quickly.

‘Most lines of credit charge higher interest rates than standard home loans, so when you stop to think about it, it was extraordinary to suggest that paying higher interest could pay off a loan sooner’, said Mr Greg Tanzer, ASIC’s Executive Director of Consumer Protection and International Relations.

The loan calculators produced a graph, comparing the time taken to pay off a standard loan with the time taken using a line of credit.

However, the way the calculator was designed meant that:
- extra repayments were credited to the line of credit but not to the standard loan;
- the line of credit was at the same interest rate as the home loan; and
- these assumptions were not made clear to the consumer, so that the calculator showed that the line of credit was paid off more quickly than the home loan but it was not clearly stated that this was due to higher repayments by the borrower.

‘If financial institutions try to sell loans to consumers, such as lines of credit, through flawed comparisons, consumers may be misled into believing that there is something special about lines of credit which mean that you will own your own home sooner. That’s not true,’ Mr Tanzer said.

‘The only way to pay off your loan sooner is by moving to a loan with a cheaper interest rate or by making extra repayments. In fact, if you can afford to make extra repayments you will probably save just as much by making those payments on your existing loan, and you can avoid extra costs, such as early repayment penalties and application fees, by not refinancing,’ Mr Tanzer said.

‘The calculator software was produced by infochoice.com.au in line with industry specifications, and was used by over 100 lenders and broker groups.’

‘infochoice.com.au acted quickly to take down the calculators from over 100 websites once ASIC raised these concerns with it,’ Mr Tanzer said. ‘ASIC acknowledges the company took a co-operative and responsible approach that will benefit consumers.’

Background
Line of credit mortgages are generally interest-only loans with no set term for the loan to be repaid. The borrower then has the freedom to choose when they will make payments on the principal. Lines of credit may be good for people who have fluctuating incomes and may sometimes be able to make additional payments, but would also at times be unable to meet the normal repayments on a standard loan. They suit people who need a great deal of flexibility and can afford to pay a higher rate of interest. Borrowers who are not disciplined in their use of credit face the risk of only paying the interest each month, so that the balance of the loan never reduces.

ASIC is aware that some finance brokers promote the use of lines of credit as part of ‘debt reduction’ schemes. These schemes encourage borrowers to refinance to a line of credit with calculations, charts or graphs showing the balance of the line of credit reducing more quickly than the consumer’s existing loan. These calculations or charts may result in exaggerated claims about the amount of money consumers can save, where the broker makes unrealistic assumptions about the capacity of the borrower to make additional repayments."

etc (+ 2 key paras pasted in earlier regarding slight benefit)

If you need cash down the road you can liquidate investments, but may not be able to pull out home equity after paying a loan down (especially if you need the money because you lost your job).

But if you lost your job, how would you pay the mortgage?

Re: XLR8R

OK, so it's spam, but I didn't know the Ozzie Macquarie Bank was breaking into US territory now... you now have all your shopping centres owned by an Australian, all your newspapers and half your TV and radio stations owned by an Australian, and now it's banking products. It's reverse coca-colaisation...

DS,

Isn't TNT Reddaway (Thompson National Trucking) Aussie owned as well?

XLR8R,

Hey thanks for weighing in at 1:00 o' clock in the morning! Sure could have used you earlier in the day.

Good news! The property management company is sending a repairman by later today to stop the minor flood in my home office. Well, time for me to change the towels!

The cart guys are saying RE should be startign down:

http://www.chartoftheday.com/20061103.htm?T

Patrick.net is in the news:

http://sfgate.com/columnists/lloyd/

How about a thread on the impact of bubble BLOGs?

FAB,

Carol Lloyd has been "on the team" for some time. The entire article was filled with great links sure to educate and entertain! It's as if she structured her coverage of the topic as a "primer" for those that question today's RE prices. Ending it w/ a classy quote from Patrick kind of makes my Friday!

justme,

I beg to differ! Blache Evans isn't just any drivel. The brand she churns out is extraordinary! There was a time when she at least made a feigned effort at being somewhat unbiased but ever since the implosion has become undeniable she's been forced to pick sides. Sad.

SFWoman, Allah,

Agreed. There are times where I feel that for all our best efforts we really are 'spitting into the wind' when compared to the REIC juggernaut! It's great to have at least "some" recognition from Carol Lloyd and it's enough to keep me going.

Oh btw I thank everyone that participated in the "Accelerator" thread and given it looks played out I'm open to starting Friday on a different note. Anyone?

I'm drafting one now. It'll be up soon.

New Thread: Impact of the Real-Estate Bubble BLOG

Thanks to FAB for the initial suggestion for the thread.

Different Sean

Here's the link for the UK mortgage info and the calculator is on a sidebar - which I originally posted in the middle of this thread. It sounds like the UK one is a better product as there's none of this heloc/2nd mortgage crap going on - it's just one loan rolled in with your savings and current account and yes, you can take payment holidays if you want to take time off or loose your job etc - and they have warnings plastered all over the product about being responsible. Yes, they charge a few fees at the beginning to set it up, but I've looked at them and they are the standard fees incurred on any mortgage in the UK - and a lot less than those in the US.

http://www.oneaccount.com/onev3/rates/toa-rates.shtml

And I ran the numbers that I would have had in the UK 6 years ago and it worked out I'd pay the loan off in just under 10 years, save 60-70,000 GBP and in order to match that I would have had to have a 1.7% interest rate on a normal fixed loan to compete - we had a 3% at the time.

Claire,

Thanks for pasting that in again, I couldn't be a**ed scrolling around again -- and IE Search always crashes my browser in this forum...

The UK oneaccount product seems to charge a lower variable interest rate than standard ARMs. Unfortunately, the US and Oz products charge up to 2% higher, citing 'higher number of account transactions' as the justification. You will have to go in to any of these products with your eyes open, obviously. You cannot just rely on a slick presentation by a mortgage broker based on a quick spreadsheet graph, if they are going to misrepresent the real world outcomes by sleight of hand. This is your final consumer warning. It seems to depend mostly on what country you're in as to whether the banks are cutting you a genuinely good deal or not...

The oneaccount product seems to be a very good one, at first sight. 5.95% interest on the credit card feature is another plus. (Clearly you don't want to rack up too much on the CC regardless. But think how much more damage Casey could do with only 5.95% rates on his CC! He could attend so many more seminars!)

Even with your oneaccount product, I would go in warily, to make sure there were no hidden catches or misrepresentations, as per the skewed calculators.

This really just comfirms my provisos spelt out above, and as most of the readers of this site are in US, where ther is a 2% hike on the LOC interest rate, caveat emptor.

This is a Sydney Morning Herald rehash of the ASIC warning, from 2004:

Warning over line of credit lending
By David Potts
August 29, 2004
The Sun-Herald

Borrowers are being duped into debt-reduction loans which finish up making them worse off, the Australian Securities and Investments Commission (ASIC) has warned.

The warning comes because a spate of mortgage brokers have been telephoning householders, known as cold calling, offering to reduce their mortgages by using line of credit and offset accounts. Often the loans are from respectable lenders.

In some cases borrowers have been lured from their loans into interest-only line of credit accounts that come with a credit card, only to pay up to $8000 for the switch and have a bigger mortgage.

Carolyn Bond of the Consumer Credit Legal Service warned that claims for line of credit and offset accounts, which are like savings accounts except the interest comes off the mortgage, were a "hoax". She said the only way a mortgage can be reduced is by making extra payments.

An investigation by The Australian Financial Review Investor, inside today's Sun-Herald, reveals that the benefits of a line of credit loan - where you pay in your salary, use a credit card for expenses and at the end of the month use the line of credit to pay it off - will at best slice a few months off a typical mortgage, not the often-claimed being debt free in seven years.

ASIC said the savings "achieved for most people will be minimal". If the line of credit interest rate is higher than that which rate borrowers are on now, there are no benefits at all.

But high-pressure commission-driven brokers were spending up to five hours at borrowers' homes, refusing to leave until a contract was signed.

One couple who had a $73,000 home loan finished up with an $86,000 mortgage even though the husband was unemployed.

Lastly, this is page 5 of an online article by Australian Choice, the magazine of the Australian Consumers Association:

CHOICE - Fast-track your mortgage - Schemes to think twice about