Years ago, I was in the middle of a major project when AT&T Cingular shut off my cell phone. They had changed my account number when I upgraded service, never mentioning the change in account number OR the credit balance building up under the old account number as the new account became delinquent. Eventually, we straightened it out. They got the credit balance transferred to the new account, and AT&T Cingular even "generously" agreed to waive the $25 re-connect fee and all of the late fees.
For that project I mentioned, I charged many thousands of dollars of equipment to my personal credit card. I had worked with my particular client long enough to know, without a doubt, that they would pay on time once the project was complete.
Around the same time, Chase, the company that owned my credit card, notified me that I was in Universal Default and my interest rate would now be 29%. I called to ask why, and they said I had made a late payment to someone. They would not tell me who was reporting the late payment. They would not reconsider their decision, and no one at the company would tell me, specifically, why I was in Universal Default. Now, many years later, I realize that the AT&T Cingular snafu was right around the same time - but, back then, I didn't know what Chase was talking about. So I had no choice but to pay the usurious interest rate until I could pay off the account. If Chase had simply raised my interest rate (absent the declaration of Universal Default), I could refuse to accept the higher rate, close my account, and pay the balance at the prior interest rate. In Universal Default, I had no such right of refusal. My interest rate climbed 19% immediately, retroactively (on balances charged at the lower rate), and with no recourse.
Meanwhile, Universal Default can be invoked by other creditors (that's why it's Universal - if one company says you're in default, any other company with Universal Default can apply Universal Default terms to your account). So my backup line of credit was pulled. I ended up selling my second car to get through the pinch, and, of course, I cancelled my Chase account. I will never do business with them again. Ever.
I was very, very fortunate that my Universal Default nightmare only lasted a few months before I was able to tell Chase to shove my full and final payment up their, um, closed accounts file. In the meantime, I got an ugly glimpse of Universal Default. I learned one of the unanticipated risks of carrying a balance on credit cards, and I changed how I manage money.
If you carry a balance on your credit cards, it might benefit you to become positively paranoid about avoiding Universal Default. Make sure that every bill is paid on time. Check your credit limit online in between billing periods. And pay off that balance as quick as you can, because banks are looking for new sources of revenue right now.
I should have fought back.
In retrospect, I accepted Chase's actions far too easily. I should have combed through the original contract terms to find out what rights I had to protest Universal Default. I should have gotten a copy of my credit report, so I could fight the Universal Default designation with hard evidence. I should have contacted the local legal clinic for advice and a strongly worded letter. But, at the time, I had no clue how I could prove that I hadn't missed payments on anything. (Running a new business, I didn't have a lot of money to hire a lawyer).
If I had gone into Universal Default because of an unknown credit line reduction, I would fight it with every resource available to me. It's one thing to invoke Universal Default for an action the consumer should have known about (a late payment); it's quite a different and dirty and sleazy and most-likely-illegal thing to invoke Universal Default for an action the bank took, which the consumer wouldn't have known about until after exceeding a lowered credit limit.
If I went into Universal Default for exceeding a lowered credit line before receiving notice that the credit line was lowered, I would become the squeakiest wheel the bank ever heard. I would make a complaint with http://www.consumer-action.org/ and http://www.consumersunion.org/. I would be willing to testify to Congress and/or tell my story to the media. And you bet your buttons I would contact every one of my elected representatives, state and federal, asking for help. Now that we taxpayers are direct investors in the credit card companies, our government reps are sort of like the banks' unofficial, unwanted Board of Inept Directors. I think that's a bad thing, but if some good can come of that bad thing, then I'd use it. Banks want continuing help from the government, so they are probably a little more responsive to Congresspeoples' inquiries right now - and it wouldn't hurt for our reps to better understand how these banks really do business.
Interesting reading: http://www.consumer-action.org/news/articles/2008_credit_card_survey/ Note that these are survey responses by banks. I can tell you right now that some of the answers - from my own card issuer(s) and those I've read junk mail from recently - are flat-out wrong. Citibank's response to "Would you ever reduce my credit limit?" was No. But it's interesting what the banks will admit (like charging a late fee if the due date is a weekend or holiday when they are closed).
Sunday, November 30, 2008
Friday, November 28, 2008
Reduced credit limits; Big Deal
After Citibank lowered my credit limit, I got to thinking. Citibank claims they mailed (the undated) notification on November 5th, but I received it on Nov. 26th, the day before Thanksgiving. Citibank e-mails me balance transfer offers, but they didn't e-mail me about changing my account terms. If I were a different consumer, this could have been disastrous. I had 3 weeks to unknowingly exceed my new, lower credit limit - racking up over-the-limit fees and falling into Universal Default. Most of my mail arrives within 3 days - why Citibank's notice took 21 days is sheer mystery. But that 21 day delay in notification effectively made the credit limit reduction retroactive - I found out about it on Nov. 26th, but it took effect 3 weeks before I knew anything about it.
Consider a consumer carrying a moderate $2,000 balance out of a $6,000 credit limit. If Citibank lowered his limit to $4,000 on November 5th and he bought 4 plane tickets on November 10th for a Thanksgiving trip, he could easily max out his card long before coming home to notification of the credit line decrease. Buying $2,000 plane tickets at 10% interest - suddenly becomes a major offense. By exceeding the new and unknown lower credit limit, he gets hit with $30 fees every month he's over his new credit line, and 29% interest rates eating up $100 a month before he can pay the balance down.
For some consumers, especially ones carrying a lot more than a $2,000 balance, going into Universal Default can push them over the edge, from struggling-but-making-it to "f- it, why bother paying my credit card when I cannot possibly get ahead of it at 30% interest?" A credit card holder who didn't buy a McMansion, who is trying to do the right thing, trying to pay down debt and build up savings and work up to a better spot in life, reads every day about homebuyers and bankers and brokers and insurance companies getting bailed out. No bailout for the credit card debtor, but she keeps making her payments, trying to whittle it down, and then WHOMP! Out of nowhere, the bank changes the rules and she's suddenly over her head without doing a damned thing to fall into the abyss. Why should she keep making payments anymore? Her share of the financial bailout - counting all the cash the Fed is pumping into liquidity along with the direct bailouts of financial institutions - is over $20k++ and suddenly the bank needs to cheat her out of an extra $100 a month by telling her extra slowly that her credit line has been cut right before the holidays.
Maybe our imaginary consumers shouldn't carry a balance at all. It would be good for our economy, in the long run, if people consumed a little less than they produce. We should all carry a balance - in our savings accounts. But we don't, and the path from here to that economic utopia will be painful for everyone. And if the banks' greed and stupidity pushes people into Universal Default and that causes some of them to go into genuine, not-making-payments default, well, gosh darn it, those bastards will be back for more bailout money next year. I don't object to lowering credit limits, and I only object to tightening credit in the sense that "hey, that's not why the government is giving you bailout money!" I object to the sleazy way the banks are doing this, trying to wrest a couple more nickels out of people through downright unethical behavior.
The government is trying to loosen credit and persuade consumers to go out and stimulate the economy. The banks receiving bailout money are doing the exact opposite - they're restricting credit availability to everyone, even great credit risks, and then they're whomping innocent consumers with changes that can push them over the edge. Are the credit card companies trying to push default rates up, to justify yet another round of bailout payments? What other justification could they possibly have for virtually retroactive account changes?
Consider a consumer carrying a moderate $2,000 balance out of a $6,000 credit limit. If Citibank lowered his limit to $4,000 on November 5th and he bought 4 plane tickets on November 10th for a Thanksgiving trip, he could easily max out his card long before coming home to notification of the credit line decrease. Buying $2,000 plane tickets at 10% interest - suddenly becomes a major offense. By exceeding the new and unknown lower credit limit, he gets hit with $30 fees every month he's over his new credit line, and 29% interest rates eating up $100 a month before he can pay the balance down.
For some consumers, especially ones carrying a lot more than a $2,000 balance, going into Universal Default can push them over the edge, from struggling-but-making-it to "f- it, why bother paying my credit card when I cannot possibly get ahead of it at 30% interest?" A credit card holder who didn't buy a McMansion, who is trying to do the right thing, trying to pay down debt and build up savings and work up to a better spot in life, reads every day about homebuyers and bankers and brokers and insurance companies getting bailed out. No bailout for the credit card debtor, but she keeps making her payments, trying to whittle it down, and then WHOMP! Out of nowhere, the bank changes the rules and she's suddenly over her head without doing a damned thing to fall into the abyss. Why should she keep making payments anymore? Her share of the financial bailout - counting all the cash the Fed is pumping into liquidity along with the direct bailouts of financial institutions - is over $20k++ and suddenly the bank needs to cheat her out of an extra $100 a month by telling her extra slowly that her credit line has been cut right before the holidays.
Maybe our imaginary consumers shouldn't carry a balance at all. It would be good for our economy, in the long run, if people consumed a little less than they produce. We should all carry a balance - in our savings accounts. But we don't, and the path from here to that economic utopia will be painful for everyone. And if the banks' greed and stupidity pushes people into Universal Default and that causes some of them to go into genuine, not-making-payments default, well, gosh darn it, those bastards will be back for more bailout money next year. I don't object to lowering credit limits, and I only object to tightening credit in the sense that "hey, that's not why the government is giving you bailout money!" I object to the sleazy way the banks are doing this, trying to wrest a couple more nickels out of people through downright unethical behavior.
The government is trying to loosen credit and persuade consumers to go out and stimulate the economy. The banks receiving bailout money are doing the exact opposite - they're restricting credit availability to everyone, even great credit risks, and then they're whomping innocent consumers with changes that can push them over the edge. Are the credit card companies trying to push default rates up, to justify yet another round of bailout payments? What other justification could they possibly have for virtually retroactive account changes?
Will this reduce my credit score?
A couple of things that go into our credit scores include how much of our credit lines we have ever used. The credit report details our current balance, high balance, and credit limit. If a consumer runs their credit card up to the limit and then goes over the limit, it looks - to the facile programming logic of a credit-scoring computer - like that person is financially irresponsible. It's not good to exceed your credit limit. But if your credit limit gets lowered to less than your highest balance, it can look like you have been irresponsible in keeping track of your spending.
When Citibank cut my credit limit, it may have reduced my credit score. I don't remember if I've ever used the full credit line. But, in any event, the proportion of my high balance to my new credit limit will be less favorable. Closing my oldest charge account won't help, either - FICO takes into account the age of accounts, with older accounts showing a longer history of responsible payment. Since I don't have other revolving debt, the proportional hit will be bigger.
If this lowers my credit score - especially since I still live in Sacramento metro, one of the areas hardest hit by the housing downturn - my other credit cards could potentially reduce my credit limits or close my account. No big deal; if all of my credit cards were terminated, I could still use my rewards ATM/visa card, but it wouldn't give me the consumer protections that credit cards provide.
When Citibank cut my credit limit, it may have reduced my credit score. I don't remember if I've ever used the full credit line. But, in any event, the proportion of my high balance to my new credit limit will be less favorable. Closing my oldest charge account won't help, either - FICO takes into account the age of accounts, with older accounts showing a longer history of responsible payment. Since I don't have other revolving debt, the proportional hit will be bigger.
If this lowers my credit score - especially since I still live in Sacramento metro, one of the areas hardest hit by the housing downturn - my other credit cards could potentially reduce my credit limits or close my account. No big deal; if all of my credit cards were terminated, I could still use my rewards ATM/visa card, but it wouldn't give me the consumer protections that credit cards provide.
Citibank: The Grinch Who Stole my Credit Limit
I'm in a real-estate-meltdown zip code. I've read about credit card companies terminating and reducing credit lines for folks in declining industries, folks who charge at rent-to-own stores, and even folks in the wrong zip code. But I continue to receive credit card solicitations. I thought my over-800 credit score made me immune to credit cutbacks. I was wrong.
Wednesday's mail contained a note from Citibank (and another pre-approved Gold card from American Express). I almost shredded Wednesday's letter, unread, since it looked just like all the balance transfer offers they send me every couple of months. I've been a Citibank customer for more than 15 years, and I've never missed a payment. I don't carry any debt outside of a small mortgage, but I do use my rewards cards for everything from purchases to monthly utility bills. I get hundreds of dollars in rewards checks this way.
My Citibank card doesn't offer rewards, and the interest rate is several points higher than my other cards (except AmEx). So I rarely use it. They do offer have a Virtual account number tool that lets me create one-time-use virtual credit cards for online transactions, so I do use my Citibank card a couple times a month. For a while there, they gave me a rebate on hardware store purchases, and I used the card a LOT more until the offer expired.
Now Citibank has cut my credit line - because I don't use their card enough. I know I'm not a super-profitable customer, since I don't carry a balance at 10%. But then, too, they'll never have to write off a penny on me. A couple percent in (ATM) transaction fees makes my bank plenty happy - wouldn't Citibank benefit from transaction fees on low-risk transactions, too?
If you ran a credit card company, wouldn't you try to keep long-term, never-missed-a-payment, no-debt customers happy? If they weren't using my card anywhere near as much as they used other cards, I would try to make my card more valuable to them. But Citibank decided to punish me for not charging a lot to their card nor carrying a balance with them. So I closed my account.
Perhaps I overreacted, since the reduction was minimal. They still left me with enough credit to buy a small car, but 1) I'm tired of the junk mail asking me to transfer my (non-existent) loans to my Citibank card, every flipping month; 2) I'm still a little burned on my Citibank stock losses (brilliant recommendation from Morgan Stanley, eh?); and 3) that's just bad business and I don't like to do business with companies that don't get it. So that's one less stack of unsolicited balance transfer checks to shred every month. Yippee!
Wednesday's mail contained a note from Citibank (and another pre-approved Gold card from American Express). I almost shredded Wednesday's letter, unread, since it looked just like all the balance transfer offers they send me every couple of months. I've been a Citibank customer for more than 15 years, and I've never missed a payment. I don't carry any debt outside of a small mortgage, but I do use my rewards cards for everything from purchases to monthly utility bills. I get hundreds of dollars in rewards checks this way.
My Citibank card doesn't offer rewards, and the interest rate is several points higher than my other cards (except AmEx). So I rarely use it. They do offer have a Virtual account number tool that lets me create one-time-use virtual credit cards for online transactions, so I do use my Citibank card a couple times a month. For a while there, they gave me a rebate on hardware store purchases, and I used the card a LOT more until the offer expired.
Now Citibank has cut my credit line - because I don't use their card enough. I know I'm not a super-profitable customer, since I don't carry a balance at 10%. But then, too, they'll never have to write off a penny on me. A couple percent in (ATM) transaction fees makes my bank plenty happy - wouldn't Citibank benefit from transaction fees on low-risk transactions, too?
If you ran a credit card company, wouldn't you try to keep long-term, never-missed-a-payment, no-debt customers happy? If they weren't using my card anywhere near as much as they used other cards, I would try to make my card more valuable to them. But Citibank decided to punish me for not charging a lot to their card nor carrying a balance with them. So I closed my account.
Perhaps I overreacted, since the reduction was minimal. They still left me with enough credit to buy a small car, but 1) I'm tired of the junk mail asking me to transfer my (non-existent) loans to my Citibank card, every flipping month; 2) I'm still a little burned on my Citibank stock losses (brilliant recommendation from Morgan Stanley, eh?); and 3) that's just bad business and I don't like to do business with companies that don't get it. So that's one less stack of unsolicited balance transfer checks to shred every month. Yippee!
Thursday, November 27, 2008
Friday, November 14, 2008
Treasury Draws Fire for Shift in Rescue - WSJ.com
Treasury Draws Fire for Shift in Rescue - WSJ.com: "Another problem: If the government purchased securities from banks, they [the banks] would likely have to record further losses on the markdown price, which many could ill afford."
You have gotta be kidding. I know I'm just a podunk hicktown Sacramento county nobody, but this was obvious from day one. The brain trust leading us throught the greatest financial crisis of our generation didn't realize that you can 1) buy securities from the banks at a price that is fair to the taxpayer; 2) buy securities from banks at a price that shores up their net assets (pick one). In the midst of a financial crisis, it might be nice and generous to pay banks the highest justifiable price for the securities, but, if the securities were really worth that price, the banks could sell them for that price on the open market.
You have gotta be kidding. I know I'm just a podunk hicktown Sacramento county nobody, but this was obvious from day one. The brain trust leading us throught the greatest financial crisis of our generation didn't realize that you can 1) buy securities from the banks at a price that is fair to the taxpayer; 2) buy securities from banks at a price that shores up their net assets (pick one). In the midst of a financial crisis, it might be nice and generous to pay banks the highest justifiable price for the securities, but, if the securities were really worth that price, the banks could sell them for that price on the open market.
Wednesday, November 12, 2008
What's next, inflation or deflation?
What's next? If deflation is coming, I'm staying in cash. If inflation is coming, I'm buying all the rental properties I can afford. There's an argument for both.
The government can't afford deflation. Deflation would reduce their tax income while the government debt remains the same. The debt as a percentage of GDP or as a multiple of tax revenues would become even more enormous than it is now. So I would expect the government to do everything they can to avoid deflation - even at the risk of creating rampant inflation.
Although we're all breathing a huge sigh of relief over falling oil prices, gas is still over $2 a gallon at my corner station. In 2003, gas was $1.68 a gallon, and, in 2001, it was closer to $1.35. Opec wants to keep gas prices high, and who can blame them? We all want to keep our incomes as high as we can. Consumers have shown their price elasticity for gas, and, the bottom line is, we'll pay $3 a gallon and complain about it but keep buying it. Now that oil producers know we'll pay that much, they would be bad business people for accepting less. That's inflationary, because oil goes into everything - we burn it for heat, we produce electricity with it, we make everything from plastic grocery bags to medical implants from it, and we use it to transport every product we make from source to sale. Gas prices have a huge influence on consumer prices, because everything has to be trucked, shipped, flown, railroaded, or some combination thereof.
The declining value of the dollar - thanks, in large part, to our government and consumer debt - is inflationary. Everything we import is costs more when paid in deflating dollars.
On the other hand, we could be facing deflation.
As Americans worry about the future, they save more and spend less. People with products and services to sell, have to lower their prices to induce consumers to spend. Every newspaper has ads with massive rebates, incentives, and discounts on American cars. If you've been on the fence about remodeling, try getting some fresh quotes. Contractors are on sale. Lowes' price tags all say "new low price." And the Going-Out-Of-Business sales start at least 20% off. That's deflationary.
Unemployed Americans now number over a million. New layoffs are counted in the hundreds of thousands. Unemployed people don't tend to spend a lot, and they don't earn a lot. That's deflationary. Retail - the old "well, if I don't find anything else, I can go work at the mall" backstop for the unemployed, is struggling. People scraping by on savings is a deflationary force.
The Visa/Mastercard/HELOC printing press has virtually shut down. People are afraid to borrow, and that's okay, because banks are afraid to lend. Given the exponential effect lending and borrowing have on money supply, a reduction in borrowing is extremely deflationary. But, don't worry, the government is still borrowing.
An anonymous Internet user commented several years ago that we were heading for inflation in necessities and deflation in luxuries. Maybe, but a latte still costs $4.
The government can't afford deflation. Deflation would reduce their tax income while the government debt remains the same. The debt as a percentage of GDP or as a multiple of tax revenues would become even more enormous than it is now. So I would expect the government to do everything they can to avoid deflation - even at the risk of creating rampant inflation.
Although we're all breathing a huge sigh of relief over falling oil prices, gas is still over $2 a gallon at my corner station. In 2003, gas was $1.68 a gallon, and, in 2001, it was closer to $1.35. Opec wants to keep gas prices high, and who can blame them? We all want to keep our incomes as high as we can. Consumers have shown their price elasticity for gas, and, the bottom line is, we'll pay $3 a gallon and complain about it but keep buying it. Now that oil producers know we'll pay that much, they would be bad business people for accepting less. That's inflationary, because oil goes into everything - we burn it for heat, we produce electricity with it, we make everything from plastic grocery bags to medical implants from it, and we use it to transport every product we make from source to sale. Gas prices have a huge influence on consumer prices, because everything has to be trucked, shipped, flown, railroaded, or some combination thereof.
The declining value of the dollar - thanks, in large part, to our government and consumer debt - is inflationary. Everything we import is costs more when paid in deflating dollars.
On the other hand, we could be facing deflation.
As Americans worry about the future, they save more and spend less. People with products and services to sell, have to lower their prices to induce consumers to spend. Every newspaper has ads with massive rebates, incentives, and discounts on American cars. If you've been on the fence about remodeling, try getting some fresh quotes. Contractors are on sale. Lowes' price tags all say "new low price." And the Going-Out-Of-Business sales start at least 20% off. That's deflationary.
Unemployed Americans now number over a million. New layoffs are counted in the hundreds of thousands. Unemployed people don't tend to spend a lot, and they don't earn a lot. That's deflationary. Retail - the old "well, if I don't find anything else, I can go work at the mall" backstop for the unemployed, is struggling. People scraping by on savings is a deflationary force.
The Visa/Mastercard/HELOC printing press has virtually shut down. People are afraid to borrow, and that's okay, because banks are afraid to lend. Given the exponential effect lending and borrowing have on money supply, a reduction in borrowing is extremely deflationary. But, don't worry, the government is still borrowing.
An anonymous Internet user commented several years ago that we were heading for inflation in necessities and deflation in luxuries. Maybe, but a latte still costs $4.
A currency printing press in your wallet: Fractional Reserve banking
Bank regulations require banks to keep enough money "in reserve" to meet customers' withdrawal needs and generally remain in business. Fractional reserve banking allows a bank to keep only a fraction of its deposits in reserve. That fraction varies, but howstuffworks reports that it is currently 3% to 10%. Wikipedia does a nice job of illustrating how a $100 deposit, through loans that are then deposited at other banks, can become $457 in currency. (Note that they are using a 20% reserve requirement in their scenario - actual reserve requirements are much lower.)
If I sell my house for a $100,000 profit and then deposit that money with my bank, the bank only has to keep a portion of the cash in reserve, say, $10,000. They can then lend my neighbor $90,000. If he uses it to buy an RV from the lady down the street, and she deposits the money in the bank, then the bank credits $90,000 to her account, puts $9,000 in reserve, and looks for someone to borrow the remaining $81,000. From that original $100k, we have my $100,000 checking balance and the RV seller's $90k in the bank. We just printed money, without bothering the government's mint. The "created" money expands exponentially.
So, if you wondered where all that money was coming from to fund home purchases at double 2001 prices, now you know. The banks, essentially, printed it out of thin air. Yippee, we're all rich, everyone can afford a Mercedes and a Humvee and a pair of jet skis. My Visa card is a pocket-sized mint.
So what happens if somebody defaults after borrowing money the bank never had? Hopefully, the bank can make up the difference out of profits. If a lot of people default on their loans, the bank can still hope to make the money back by the time I withdraw my $100k. But with stock income gone, prices climbing, and job losses mounting, more people are withdrawing from their savings.
Leverage=risk. So banks prefer to make their money originating loans, and then sell the loan to investors who can afford the risk. But investors left a clause in there that the banks have to buy back certain types of bad loans - early default, fraudulent loans, etc. Banks didn't plan to have to buy those loans back. Banks planned to keep making money.
A $10,000 cash loss is a $100,000 loss in lending ability. If Ocrenter kept a tally of losses, just on the houses he features, how much would you guesstimate that would be? A couple hundred million in losses? A couple hundred million in losses is a couple hundred billion in loans the bank can't afford to make anymore. Fractional reserve requirements create exponential growth in money supply - but when the pendulum swings the other way, it's an exponential contraction in money supply.
Ruh-roh.
If I sell my house for a $100,000 profit and then deposit that money with my bank, the bank only has to keep a portion of the cash in reserve, say, $10,000. They can then lend my neighbor $90,000. If he uses it to buy an RV from the lady down the street, and she deposits the money in the bank, then the bank credits $90,000 to her account, puts $9,000 in reserve, and looks for someone to borrow the remaining $81,000. From that original $100k, we have my $100,000 checking balance and the RV seller's $90k in the bank. We just printed money, without bothering the government's mint. The "created" money expands exponentially.
So, if you wondered where all that money was coming from to fund home purchases at double 2001 prices, now you know. The banks, essentially, printed it out of thin air. Yippee, we're all rich, everyone can afford a Mercedes and a Humvee and a pair of jet skis. My Visa card is a pocket-sized mint.
So what happens if somebody defaults after borrowing money the bank never had? Hopefully, the bank can make up the difference out of profits. If a lot of people default on their loans, the bank can still hope to make the money back by the time I withdraw my $100k. But with stock income gone, prices climbing, and job losses mounting, more people are withdrawing from their savings.
Leverage=risk. So banks prefer to make their money originating loans, and then sell the loan to investors who can afford the risk. But investors left a clause in there that the banks have to buy back certain types of bad loans - early default, fraudulent loans, etc. Banks didn't plan to have to buy those loans back. Banks planned to keep making money.
A $10,000 cash loss is a $100,000 loss in lending ability. If Ocrenter kept a tally of losses, just on the houses he features, how much would you guesstimate that would be? A couple hundred million in losses? A couple hundred million in losses is a couple hundred billion in loans the bank can't afford to make anymore. Fractional reserve requirements create exponential growth in money supply - but when the pendulum swings the other way, it's an exponential contraction in money supply.
Ruh-roh.
Monday, November 10, 2008
365 Days on Market, and then an Above-Market sale
Here's a recent example:
6848 MELLODORA DR, Orangevale, CA 95662
List Date: 05/31/07
List Price: $245,000
MLS status is now "inactive"; zillow shows a sale for $255,000.
I am hard-pressed to believe that the market value was anything near $245k. Yet now it has sold for more than asking price; surely there was some cash, renovation money, or exceptional closing cost assistance kicked back.
With a price in the mid-200s, the buyer could take out an FHA 203k loan for remodeling. Most closing costs in this market are typically paid by the seller. Nehemiah type down payment "assistance" are supposed to be gifts - if the selling price is raised by the amount of the downpayment assistance, it is not a gift. And the property tax in California is determined by the selling price - a buyer saves money by minimizing the selling price, thus minimizing property taxes for as long as they own the property. So a reasonably intelligent buyer would roll closing costs into the loan rather than the purchase price. In other words, there aren't many reasonable explanations for paying more than asking price on a home, except cash-back-at-close or horrible credit.
Buyer beware. Ask your agent to specify exactly what concessions are included in the selling price of comparables.
6848 MELLODORA DR, Orangevale, CA 95662
List Date: 05/31/07
List Price: $245,000
MLS status is now "inactive"; zillow shows a sale for $255,000.
I am hard-pressed to believe that the market value was anything near $245k. Yet now it has sold for more than asking price; surely there was some cash, renovation money, or exceptional closing cost assistance kicked back.
With a price in the mid-200s, the buyer could take out an FHA 203k loan for remodeling. Most closing costs in this market are typically paid by the seller. Nehemiah type down payment "assistance" are supposed to be gifts - if the selling price is raised by the amount of the downpayment assistance, it is not a gift. And the property tax in California is determined by the selling price - a buyer saves money by minimizing the selling price, thus minimizing property taxes for as long as they own the property. So a reasonably intelligent buyer would roll closing costs into the loan rather than the purchase price. In other words, there aren't many reasonable explanations for paying more than asking price on a home, except cash-back-at-close or horrible credit.
Buyer beware. Ask your agent to specify exactly what concessions are included in the selling price of comparables.
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