Most of us aren’t particularly keen on recessions.  We tend to thing of them as negative events, the kinds of things with which we’d rather not deal.  Sure, the repo men are loving the downturn, but everyone else seems to be suffering–or at the risk of suffering.  

The idea of examining the benefits of a recession seems a lot like marveling at the great clown performances John Waye Gacy turned in at various children’s parties, in a way.  No matter how many kids he made giggle, it couldn’t possibly make up for the corpses in the crawlspace.  So it is with a recession.  On-balance, it’s such bad news for so many people that it feels a little unsavory to talk about the upside.  There is, however, a real potential set of advantages to be gleaned from this current economic mess and we should recognize them before we become completely convinced that the we’re approaching some kind of Apocolypse.  

First, if you’re relatively insulated from the economic downturn and have sufficient security to make purchases and/or investments with some element of risk, there are real bargains to be had out there.  The stock market features a slew of undervalued issues (no, I’m not going to provide specific stock tips here) and houses are cheap at the moment.  If you’ve got a little room in your finances or have a great credit score, you might want to go shopping.

Second, the Fed’s efforts at staving off a recession have largely consisted of pushing down interest rates.  So, if you fall into the aforementioned group, you’re going to see lower price tags on major purchases and lower price tags on the money you’ll borrow to make them.  Between these two factors, you can get a whole lotta house on the cheap these days.  Just in case, though, buy something you plan on living in, okay?

Third, there’s a big picture reason to at least partially embrace the recession.  It’s going to clean house.  It will force businesses to become more efficient and will reward creativity and quality while punishing the fat and lazy.  In the U.S., everyone claims to love a free market until they see this part of the cycle.  It’s necessary, though.  It prunes out those who made poor decisions and creates openings for smarter, leaner businesses.

Fourth, sticking with the big picture theme, a recession creates an impetus to evaluate the way we’ve been doing things as a nation.  Sometimes, you can actually learn a lesson or two from the consequences of your bad behavior and this could be such a situation.  Maybe it’s not bad for us to come to grips with the fact that credit overuse/overextension and a pollyannish belief in perpetual growth weren’t the best ways to run our financial houses.  

Fifth, if you take it down to the personal level, this economic downturn can be viewed as an opportunity for a little personal development.  Even if that isn’t really part of the benefits of a recession, it is an opportunity to do something worthwhile.  Look at these lists.  Some of the alleged “benefits” aren’t too impressive, but others do offer some potetial to come out of this mess a better and smarter person than the one who entered it.

I’m sure there will be those who disagree, but I happen to think that periodic contractions of the economy are natural parts of a cycle of growth and correction.  I think that they’re inevitable when you are talking about an economy that retains at least some traits of a true market system.  When things go up, we overshoot and come back to the “right” place.  When things go down, we overshoot in the opposite direction before bouncing back.  

This recession isn’t a good thing by any stretch, but there is some good in it.  You just have to look carefully to find it.

Washington Mutual Mortgage is the mortgage lending branch of the nation’s largest savings and loan association, Washington Mutual, headquartered in Seattle, Washington.

The third largest mortgage lender in the United States, Washington Mutual offers fixed and variable rate conventional mortgages, interest-only mortgages, equity lines, and a number of ARM creative financing options.

In December of 2007, Washington Mutual Mortgage closed 160 of its 336 home loan offices across the country, and eliminated 2600 positions, constituting 22% of its entire staff. Hit hard by the subprime lending crisis, in March of 2008 Washington Mutual also reduced the 2007 compensation package of its CEO Kerry Killinger from $14.2 million to $5.25 million after its stock price dropped 70% due to huge losses in the mortgage division.

WaMu (as it is now called in its ad campaigns) has set aside $2 billion for losses in 2008 which it expects to continue into at least the third quarter.

In December of 2007 Washington Mutual Mortgage was also investigated by the Securities and Exchange Commission due to allegations that it had based some of its mortgage loans on intentionally inflated home appraisals. Though formally cleared of these allegations, the chief legal officer for Washington Mutual Mortgage, Fay L. Chapman, retired immediately after the investigation ended. Ms Chapman, then 61, insisted that no connection existed between the company’s legal troubles and her sudden departure.

Washington Mutual does offer very competitive rates on conventional fixed rate mortgages, but its terms on ARMs vary widely and should be carefully read and understood before signing. For example, a one-month ARM option is can be hit with increases of up to 7.5% annually with no lifetime cap, and with negative amortization over the life of the loan a real possibility.

Negative amortization means that the amount owed on the home increases even though payments are made regularly and on time. Buyers who choose this option betting on mortgage rates staying low and their property rapidly gaining equity can end up owing more than their house is worth very quickly if they are wrong.

Five, seven, and ten year ARMs are also offered that carry a more reasonable 5% cap for the life of the loan, but even this can cause problems if buyers don’t realistically consider all possible outcomes. Many people only consider the best case scenario, a bad idea especially considering the real estate mess of the past year.

An even more slippery multi-pay option allows WaMu buyers to choose one of four different payment types for the first ten years of their ARM. The first payment option allows a minimum payment that does not even cover accrued interest and can result in negative amortization.

The second option is an interest-only option.

The third is for a normal principal and interest payment.

The fourth is for a 15-year principal and interest payment.

In the worst-case scenario, buyers could choose option one for ten years, owe more on their property each year than they did the year before, and then after ten years get hit with an unaffordable payment on an upside down mortgage. That might be worth doing if refinancing was an option and property values kept pace with the negative amortization, but that is a lot of ifs to be considering at the beginning of a property purchase.

People who need (or think they need) this kind of flexible payment option unfortunately tend to be the very same people who should never, ever be offered this kind of flexible payment option. It’s hard to say whether Washington Mutual is still making this kind of creative loan given the current chilly lending climate, but they do still offer it on their website: http://www.wamu.com/personal/loans/home_loan/multipay/default.asp

Washington Mutual Mortgage is likely to be around for awhile, having merged with or acquired Homeside Lending, Fleet Mortgage Corporation, PNC Mortgage, and Alta Residential Mortgage, all in the past eight years.

Given the deep cuts, huge losses, and radical changes to the mortgage division in 2008, it is almost certain they will eventually emerge a more conservative, more cautious lender.

Mortgage loans come in all shapes and sizes, with many different terms and conditions. Buyers who understand the types of mortgage loans available and which ones are best for their specific needs have a definite edge over buyers who go into home shopping without doing this research first.

A good resource that describes the basic types of mortgage loans and their terms and conditions can be found at http://mortgage-x.com/library/loans.htm.

Mortgage loans can be back by the Federal Housing Administration or the Veterans Administration. These loans are called FHA and VA loans, and are typically easier to qualify for than conventional mortgages and require less of a down payment.

The Rural Housing Service of the US Department of Agriculture is another government agency that backs low-cost loans with no down payments for buyers who want to purchase property in certain rural areas and meet certain conditions.

In addition to federally backed mortgages like FHA, VA, and RHS loans, many states and local communities offer low-cost mortgages with minimal or no down payments for buyers who meet certain income limits or are willing to live in depressed areas and rehabilitate their properties. To find out if such loans are available in your specific area, contact any licensed realtor.

Conventional mortgage loans can be conforming or non-conforming. Conforming loans follow the terms and conditions set forth by Fannie Mae and Freddie Mac guidelines, two huge corporations that purchase mortgage loans and sell them as securities to investors.

The 2008 conforming loan limit on a single-family dwelling is $417,000. In other words, $417,000 is the maximum amount you can borrow to purchase a single family home if your loan is backed by Fannie Mae or Freddie Mac, which most conventional loans are.

Conventional mortgage loans over $417,000 (for a single-family dwelling) are called non-conforming Jumbo loans. Jumbo loans tend to have a little bit higher interest rate, and may be somewhat more difficult to obtain, or, in times of tight credit, very difficult to obtain.

Within conventional mortgage financing you can find fixed or adjustable rates with various term lengths. The most common fixed rate terns are 10, 15, 20, 25, 30, and 40 years, with 15 and 30 year options being by far the most popular. The shorter the term on a fixed rate mortgage, the better (in general) the interest rate will be. Many people take out 30 year fixed rate mortgages and then refinance to 15 years after they have lived in the home for a few years.

Adjustable rate mortgages are conventional mortgages with interest rates that fluctuate over the life of the loan. Currently, adjustable rate mortgages are popularly sold as 30 year mortgages with a low fixed rate for the first 2 to 5 years, and then a variable rate that resets each year. Sometimes the initial five year period is interest-only, making the early payments artificially low, and later payments then reset each year for the rest of the mortgage.

When considering an adjustable rate mortgage it is very important to understand the terms and conditions and read everything very carefully, asking plenty of questions and possibly even hiring an attorney to review the loan documents before signing. Many people get into trouble with adjustable rate mortgages because they are confident they can refinance once the fixed rate portion is over, and then they find that market conditions have changed and they are stuck with a rate they can’t afford.

When considering an adjustable rate mortgage look for a cap on the interest from year to year and also a cap on increases over the life of the loan. If the cap is very high, or if there is no cap, you might want to consider other financing. Also, keep in mind that mortgages always come with closing costs that can be quite expensive, so factor this in to any decisions you make in which refinancing later is an important part of your plans.

Finally, many other more creative options for mortgage financing are available, but probably not as easily available as they were before the recent sub-prime mortgage meltdown. Before considering any creative options such as interest-only mortgages or reverse mortgages, it is best to consult a mortgage attorney or other trustworthy expert to insure the loan isn’t predatory or just a really bad idea.

Mortgage rates change from day to day, which is why buyers have to wait until the last minute to get the exact amount to bring to the closing from their lender. Not only do mortgage rates change from day to day, they change from state to state, and from lender to lender.

Today’s mortgage rates may differ from the weekly index rate, although both daily and weekly indexes provide information on current rates by computing an average. Daily rates show changes from one day to the next. The weekly index shows average current rates over the course of the preceding week.

Often lenders can take an educated guess at whether today’s mortgage rates are on the way up or on the way down by looking at volatility from day to day and the current market, but no one ever knows for certain what the rate will be at the time a loan is closed.

Today’s mortgage rates change according to many variable factors such as the current availability of credit, the prime rate, and various fluctuating market conditions. A number of excellent financial websites offer current updates on today’s mortgage rates, as do most major newspapers.

Remember when checking on mortgage rates that today’s rate will not necessarily be your personal rate should you apply for a home loan. Factors such as credit worthiness, income, appraised value, percentage of down payment, the kind of financial institution used, and the loan term all impact the final rate charged. The rates shown in tables of today’s mortgage rates are based on excellent credit and a down payment of at least 20%. Any deviation from these ideal conditions will change the rate on the mortgage.

Typically mortgage rates will be displayed for 30 year fixed rate loans, 15 year fixed rate loans, 5/1 ARMs (adjustable rate mortgages with interest only payments for five years that reset to an adjustable principle and interest rate tied to the prime rate once a year thereafter), 30 year fixed rate jumbo loans (fixed rate mortgages for over $417,000), and 5/1 Jumbo ARMs. These are not the only loans available; they are just the standard loans listed in today’s mortgage rate tables. To find out about other options, you need to actually speak with specific lenders.

Some good financial websites that allow you to get today’s mortgage rates from a variety of institutions and compare their terms and fees are

• www.bankrate.com
• Equifax Mortgage Match
• www.realestate.yahoo.com/loans
• www.mortgages.interest.com,
• www.hsh.com, and
• www.lendingtree.com.

You can also check the website for your local newspaper for rates, or check your favorite financial institution’s website.

Online money magazines such as:

• www.money.cnn.com
• www.fool.com, and
• http://www.msnbc.msn.com/id/8874568/.

Some major mortgage lenders and their daily mortgage rate sites are:

• www.wellsfargo.com/mortgage/rates/,

• www.eloan.com,
• www.countrywide.com, and
• www.wachovia.com.

Real estate websites publish today’s mortgage rates too. Among the top real estate websites for today’s mortgage rates are:

• www.coldwellbanker.com/real_estate/Mortgage_Resources,
• www.century21.com/finance/default.aspx, and
• http://finance.realtor.com/homefinance/findlender/findlender.asp.

When searching for today’s mortgage rates, read the analysis offered at the site as well to gain an understanding of current rate trends. For example, at this writing, even though the Federal Reserve recently made yet another cut in the rate banks charge to lend money to one another, mortgage rates are at their highest in seven weeks, remaining over 6% for even the best customers due to lingering market concerns about inflation.

In other words, the rates are not always intuitive: rates on other kinds of credit can all be dropping, but that isn’t necessarily a predictor of where mortgage rates are headed.  If you read the analyses offered by various sites, it will help you understand what is happening with rates so that you can make a better plan should you need a mortgage or a refinance. Sometimes, based on trends, it makes sense to strike while the iron is hot. Other times, waiting it out can be the best strategy.

If you don’t live in Ohio, Indiana, Pennsylvania, Kentucky, West Virginia or Michigan, you might not be familiar with Huntington Bank.  

Huntington is a regional bank with more than 200 locations scattered over the above-mentioned states (and a few in neighboring areas).  Huntington does offer some services on a more national level, in addition to supplying national online retail services.  

When you add it all up, Huntington is near the 600 slot of the Fortune 1000 and is the 29th largest bank in the United States.

Huntington appears to have a strong commitment to small business lending.  A recent press release published at MarketWatch trumpets Huntington’s performance in the area of Small Business Administration lending.  According to the release:

Huntington ranked first in both loan dollar volume and number of loans among all SBA lenders in Ohio with 791 loans for a total of $73.7 million. In Indiana and Kentucky, Huntington ranked first in loan dollar volume with a total of $23.6 and $6.6 million, respectively. Huntington also ranked No. 1 for the number of SBA loans in the state of West Virginia with a total of 44 loans.

Huntington moved up from its 2007 ranking to now become 11th in the nation for number of SBA loans and 15th in the nation for total 7(a) loans, the most common type of loan used by small businesses.

Huntington’s National Director of SBA Lending, Craigh Street, noted that the bank is “committed to helping helping business owners identify solutions so they can achieve their goals.”

That interest in small business lending is evident in some of Huntington’s outreach, too.  For instance, the bank recently issued a series of tips and recommendations to assist small business owners in dealing with medical coverage costs.

Huntington might be doing well with its business lending practices, but it’s had a little trouble with respect to mortgage lending.  Like so many U.S. banks, Huntington Bank suffered some serious blowback from the sub-prime mortgage market collapse.  

When Franklin Credit Management was getting smacked around in the meltdown, Huntington was watching carefully.  That’s because Franklin owed Huntington over a billion dollars.  During the darkest days of subprime chaos, Huntington saw its stock value drop considerably–down 13% in a single day on one occasion.

The aftermath is still being felt at Huntington today.  A Pittsburgh Tribune-Review article entitled “Stressed Banks Suspend Dividends” specifically mentioned HB as one of the institutions who are still feeling some pain in the wake of the subprime ugliness.  

According to Columnist Thomas Olson, “For instance, the parent of Huntington Bank, which has 41 branches in this region, cut its quarterly dividend in half to about 13 cents a share, on April 15.”

There’s no reason to think that this large bank is in any real trouble.  It’s one of the biggest in the country and appears to be solid and solvent.  Even so, it was unable to escape taking a few punches during tough national economic times.

In terms of Huntington’s services, they do offer a full range of banking options.  They’re part of a large bank company that’s running a series of “neighborhood” banks, as those who live in the area serviced by HB undoubtedly know.  Initial research indicates that they offer a full slate of products to their clients and that they operate a robust Internet banking system.

If you’ve given any thought to successfully managing your personal finances, you’ve undoubtedly learned that one of the most important thing you can do is to establish an emergency fund.

Setting aside cash to handle unanticipated expenses is often the best way to shield oneself from a dramatic financial crisis and virtually any financial planner worth his or her salt will insist that a client build up adequate savings before exploring more aggressive investment options.

Today, the need for a “safety net” is even more pronounced.  Credit isn’t as available as it was a few years ago, making the credit card (which was always a horrible substitute for cash savings) into a complete non-option.  Unfortunately, tight economic circumstances are also making it more difficult to build savings.

That may lead some people to wonder if a home equity line of credit could fill the safety net role.  That line of thinking isn’t new.  People have been relying on the fact that they could secure a line of credit against the equity in their home as a “backup plan” for years.

Recent news, however, suggests that the home equity loan may not be a viable alternative to cash savings anymore.

A recent Associated Press article explains:

Building a six-month emergency fund may be a near-impossible stretch for many. Taking out a home equity line of credit of $30,000 or more can help fill the gap.

Dipping temporarily into the home equity line would enable you to leave other investments with better yields intact.

Getting one may be more easily said than done without a stellar credit score, however, especially with home prices still falling. Many people with existing HELOCs are having them cut.

The downturn in the real estate market and the oft-discussed “credit freeze” are making it much more difficult to secure a home equity line of credit.  As home values continue to decline, banks are more reluctant to extend additional credit to those who have established equity lines.  They’re also less likely to extend a “HELOC” to those who don’t have one already.

Even those who already have home equity lines are learning that they don’t offer the kind of security one can have with adequate savings.  That’s because many banks are actually capping and cutting existing lines.  People who operated under the assumption that they had $X of credit available to them in case of emergency are getting letters telling them that their limits have been lowered, sometimes creating nerve wracking circumstances.

It’s hard to blame the banks for taking this position.  As foreclosures mount and home values drop, it’s becoming increasingly clear that “home sweet home” isn’t carrying the cache it once did.

The latest numbers indicate that the number of missed payments on HELOCs are up.  From a lender’s point of view, a home equity loan just isn’t as safe as it once was, so they’re cutting back.  Larger economic forces are also keeping banks rather timid, as they try to minimize their risk exposure in a volatile economy.

So, if you’ve been thinking of a home equity line of credit as a stand-in for savings, you should rethink your position.  It’s becoming clear that one shouldn’t rely on a HELOC to cover unanticipated expenses or emergency needs.

The alternative?  It’s not pretty, but it works.  Save the money.  Sure, it’s tougher for a lot of people to get the job done right now, but it’s the only way to protect yourself against nasty unforeseen circumstances.  If you don’t have an emergency fund, start building one now.  Go through your budget with a fine-tooth comb and start finding out how you can build an adequate cash reserve.

Here’s a riddle for you…

What product is often compared to insurance by experts even though other experts make a point of saying it shouldn’t be confused with insurance?

What product’s market is said to be worth seventy trillion (yes, trillion with a “t”) dollars even though no one knows how much the product is actually worth?

What product’s market has been completely devoid of regulation even though experts had been cautioning that its crash was impending–and that said crash would have massive repercussions?

Give up?  The answer is the credit default swap.

If you’re like me and virtually everyone else in the world, you may have heard this term once or twice in passing over the past several years only to see it in the headlines almost every day for the last several months.

And, if you’re like me, you could probably use a hand making sense of the discussion surrounding credit default swaps.  Let’s see if we can break down this complicated financial instrument so it all make a little more sense…

Defining a credit default swap isn’t that tough.  Lil’ ol’ Wikipedia actually does a good job of laying it out:

A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments (premium leg) to the seller, and in return receives a payoff (protection or default leg) if an underlying financial instrument defaults CDS contracts have been mistakenly compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if a specified event occurs. However, there are a number of differences between CDS and insurance; the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event.

That gives you an idea of what a “CDS” is, but it doesn’t really explain why they exist.  We can turn to Investopedia (that’s two “pedias” in one post, kids!) for a little context:

The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

Which brings us to a more pragmatic consideration.  Who, specifically, has been using credit default swaps and why have they been doing it?  Time Magazine explains it rather nicely, even though it does tread on the wrong side of the Wikipedia definition’s admonition against making a comparison with insurance:

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It’s supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

Now that might not seem like the biggest deal in the world when you consider the scope of the overall economy, but it actually is one of the biggest things out there.  The CDS market was a seventy trillion dollar business.  And almost 40% of it is in the hands of major financial institutions.

So, why is that a bad thing?  Sure, there’s a lot of money in the CDS market.  That, in and of itself, isn’t a problem.  What’s the problem?

There are several.

First, a lack of regulation/oversight/rule-making/whatever led to a very serious problem in the credit default swap biz.  Namely, people started trading these instruments back and forth with no one really bothering to consider whether the people taking on the risks associated with the swaps actually had the means to make good on them in the event of a default.  That wasn’t a well-known problem until…

Second, (you guessed it)  defaults started happening.  You can blame that on the subprime mortgage crisis or any of the other potential explanations for our journey into the land of recession.  The fact of the matter, however, is that defaults started springing up and the folks who were supposed to be able to cover the associated costs have been coming up short.

Third, these defaults and the failure of credit default swaps is giving banks a good reason to reconsider some of the bond lending and other investments they were willing to make earlier.  All of that talk about a credit freeze is starting to make sense, isn’t it?  As the aforementioned Time article noted, ” this could impact everyone from mortgage-seekers to municipalities that need money to fix roads and build schools.”

Fourth, there’s this even bigger problem of a potential domino effect.  You see, all of that crazed CDS trading, in hindsight, seems a little divorced from reality.  Consider that one expert explained that those who own default swaps don’t even know what they’re worth.  No one does.  No one has any good idea to figure that out, either. That led him to ask a very important question:

How does a global financial system work when you don’t know how to value assets?

The answer is scary because a global finance system may not be able to work at all under those circumstances.  Remember, we’re talking about seventy trillion in investments.  Thus, one columnist stated:

It could take years of litigation to figure out who owes whom what. The fear is that once the system starts failing, there will be “cascading defaults” and because the CDS market is so huge, its failure threatens the whole global economy.

I know this post is a little heavy on the doom and gloom.  It’s worth noting that not everyone shares the perspective that the CDS market’s unraveling will lead to all of us living like Man and Boy in The Road.  Whether they believe that letting the market run its course or appropriate interventions can stop the “cascade”, there are people from all economic and political persuasions who do see a way out.

Let’s hope one of them is right.

And that we follow his or her advice.

I may have lost faith in Wall St., but today I regained faith in Congress.  The House shot down the $700 billion bail out… and I could not be happier.  And you wanna know why… Ok, but first let me lay the groundwork just in case…

The gist of the bailout plan

HR 3997 would have allowed the Secretary of the Treasury to establish the Troubled Asset Relief Program.  This program would have been allowed “to purchase and to make and fund commitments to purchase, troubled assets (shaky mortgages and mortgage-backed securities) from any financial institution.”

My president, our president decided that it would be a good idea to use $700 billion of our tax dollars to save the finance industry.  He wanted to buy shaky mortgages and mortgaged-backed securities.  We all know what a mortgage is, but…

What is a mortgaged-based security?

It is sort of like a bond… an IOU.  Potential homeowners go to banks to apply for a home loan.  The bank issues the mortgages.  And then, the bank pools the loans into neat little packages and sell them on the market.  The people who buy these neat little packages receive interest and principle payments every month whenever the homeowners pay their mortgage.  In essence the investors are lending the money to homeowners and expected to receive payments every month.  The bank’s role in this is as the middleman.  For its services of connecting the buyer and lender, the bank receives a service commission.

Plain English…

Ok I got 10 friends who need a hundred dollars each.  They all ask me if I can loan them the money.  I shell out the $1,000 at 15% and get them to sign an IOU.  Then I turn to my friend Joe Blow and I say look Joe, buy these IOUs from me for $1,000. And when my 10 friends pay the bill, I’ll send you all the principal ($1,000) and interest ($150).  All I want is a small services fee of $2.

So I make $2 and Joe gets $148.  However, Joe now assumes all the risk.  If any of the friends don’t pay the bill, it is Joe who will be shafted, not me.

The problem with mortgage-backed securities

Generally, there is no problem.  Most times mortgage-backed securities are a safe bet.  Yeah, there is some risk involved, but usually not much.  The way it works is that the IOU is secured by an asset… the house.  The house is appraised by the bank, the applicant has adequate income to repay the loan, and the bank verified the homeowner’s financial credibility.

But… What happens if the house is over-valued, if the applicant overstates his ability to repay the loan, and if the banks did not adequately qualify the mortgages?

So here enters the problem…

Well what happens is… that those mortgage-backed securities are worthless and investors will lose a lot of money.

Lately, investors have been taking a lot of losses on these mortgage-backed loans because the mortgage pools are filled with subprime products, foreclosed properties, soon to be foreclosed properties… just a mess of worthless assets.  (I’m not really sure if “assets” is the right word to use here because asset implies value.)

Who are these investors?

Mortgage-backed securities are big business.  And because of the perceived low risk, many entities buy them…banks, hedge funds, pension funds, mutual funds.

Alright now back to why I am glad that this bailout was voted down.

The bailout would have rewarded corporations for bad behavior

The bailout would have alleviated the mortgage risk exposure of financial institutions (and only financial institutions).  Aren’t these the people started this mess in the first place?  Financial institutions were being careless and greedy.  They knowingly exposed themselves to subprime lenders in order to increase short term profits.  Not only did these financial institutions give money to those with questionable financial credibility, but they also engaged in other greedy and deceitful behaviors.  They overvalued houses so that they can issue first and second mortgages.  They came up with all these colorful ways to qualify borrowers… balloons, no interest mortgages, one year ARMs, etc. They made stupid choices in order to fatten their pockets, but it backfired.

I hate to get on the Harper story again, but just think about this… JP Morgan Chase loaned a family a half a million dollars.  The borrowers… a house wife and a home security alarm installer (not wealthy people).  The loan was secured with a house that cost almost a million dollars to build (the house was a free gift from Extreme Makeover: Home Edition).  At one point the family was trying to sell the house for $950,000.  It did not sell.  Why… because regardless of how much the house cost to build… a house (or anything else for that matter) is only worth as much as someone is willing to pay for it.

The house is in Lake City, GA.  The median income in Lake City $38,000, the median house value, $125,000… both less than the medians for the state of Georgia.

Now granted I don’t know much about the neighborhoods in Lakeland, GA… but the Harper’s old house was ummm… a dump (I’m not trying to be ugly, but it was).  The dump was torn down and replace with a mansion.  Great!

But if the Harper’s old house was a dump… then chances are that the houses around it are dumps too.  What sane person with a million dollars or even a half a million dollars would buy a mansion that was surrounded by dumps? I know if I had that kind of money to spend on a house, I would not be looking to buy a mansion that sits in the middle of dumps.  I would want a mansion that is surrounded by other mansions.

No matter now much it costs to build, nobody is going to buy that house for so much money.  The house is not worth a half a million, it is only worth what someone is willing to pay. 

Location, Location, Location - that is what the realtor says.  I am no realtor and I understand that.  So why would JP Morgan Chase value that house at a half a million dollars plus.

Anyway, the family could not repay the loan and it went into foreclosure.  The house went up for auction.  I am not sure what it sold for, or if it even sold at all… but either way, that was a horrible business decision on JP Morgan Chase’s part.

Taxpayers should not have to foot the bill for the bad decisions of borrowers and lenders.

The federal government has never come to my rescue when I did something stupid.  So why should they help stupid… (greedy) banks? And anyway a bailout out does not solve the problem.  It is just a band aid.  Bailing out banks just frees them to go out and make more bad decisions.  So way to go House!  I think you all really voted for the people on this one.

Friday as I was getting ready to go to work, I heard a brief comment on the local news about Washington Mutual being sold to JP Morgan.  They did not mention much else… just that simple one liner. As soon as I got to a computer, I went to CNBC.com to see what was going on.  And OMG!  What was going on was a mess! That one liner definitely did not suffice to explain the gravity of what happened.

Washington Mutual… the WaMu Whoo Hoo… gone! What the @#%$?!?!

A 120 year old bank disappeared over night.  According to what I hear… this is the biggest banking failure in history.  This seems like a bit of déjà vu.  I could have sworn I heard the same story last week, last month.  It seems that everyday… we are seeing the “biggest failure in history”.  How many more “biggest failures” can we endure?

Really people, I must be sleeping.  I am going to wake up any day now and realize that the collapse of the financial industry is a bad dream… a horrible nightmare.  But sadly, I know that I am not sleeping and no pinch is going to cure this mess.

So what happened to WAMU?

Basically, Kerry Killinger, former CEO of Washington Mutual, was paid more than $10 million dollars a year to run the bank into the ground.  And he did a great job.  A bunch of bad judgments and greedy decisions later… WaMu no longer Whoo Hoos.

Killinger left WaMu in utter ruin earlier this month.  Towards the end, he tried to redeem his egregious mismanagement by resigning his position as Chairman of the board, raising capital (TPG raised $7 billion dollars - $2 billion of their own money), laying off employees, and restructuring business lines. And to be honest, I thought his attempts to save WaMu might actually work.  (But boy was I wrong!) Apparently using bicycle patches to fill a gigantic hole ain’t enough to keep the Titanic from sinking.

But what finally took the stern under… since the fall of AIG, Lehman Brothers and Merrill Lynch on September 15^th, WaMu customers withdrew nearly $17 billions dollars in deposits.  The run on the bank rendered it virtually insolvent.  And as we learned from the recent descend of Indy Mac, for a bank… no liquidity means the feds will be arriving soon to put it out of its misery.

The FDIC came in, took over Washington Mutual, sold it to JP Morgan for $1.9 billion dollars… it was all a rather seamless transition for accountholders.  But for WaMu stockholders, for WaMu bondholders, for TPG who had just invested $2 billion dollars in WaMu… well they are up the creek without a paddle.  Or to describe it more accurately, the value of their portfolio is as deep as Atlantic seafloor… (Yeah…  chilling with the Titanic.)

But seriously this is the one thing that really bothers me about WaMu’s downfall… stockholders and bondholders got screwed.

You see… When you buy a company’s stock, that means you are buying equity… ownership in the company.  For WaMu shareholders… holding equity in a company that no longer exists means you are left with nothing.  The value of the stock… $0!

And… When you buy a company’s bonds… that means you are giving the company a loan.  The bond is like an IOU.  For WaMu bondholders… having bonds from a company that no longer exists means that the paper it is written on has more value than the bond itself.  The value of the bond… $0!

And just because you may own individual WaMu stocks and bonds… don’t think this will not impact you.  It will.  Many institutional investors, such as pension funds, mutual funds and other banks and insurance companies, owned the majority of WaMu stocks and bonds.  These pension funds are in charge of our retirement security.  These mutual funds are a part of our 401Ks… our children’s 529 accounts! If you have any money invested anywhere… then odds are you held some stake in WaMu’s success or failure.  And because WaMu failed, the value of your assets dropped.

And aside from the financial impact, the psychological impacts are more far reaching.  If consumer confidence wasn’t completely shot before, you can be guaranteed that it is now.  Consumer confidence measures how consumers feel about the current and future state of the economy.  When consumer confidence is low, then people stop spending (which contributes even more to the economic depression) and start stockpiling money… just in case.

But this situation is different in that consumers no longer feel confidence in the finance industry.  This means that instead of stockpiling money in savings accounts, folks feel more security with stockpiling it under their pillows.  And when people began taking their money out of banks… well you know what happens next (IndyMac, WaMu).

The whole thing is cyclical and as it  continues the problem gets worse.

I, for one, tend to be an optimist.  And I am certainly a strong believer in free enterprise and the ability of the market to correct itself.  But even I, with my typically rosy outlook, am getting worried.  I keep looking for the plunge to end, but the end is nowhere in sight.  Every time I think it can’t get any worse. ..  it gets worse times 2.  I just hope that WaMu will be the last to sink, but for some reason I feel that the dominoes have just begun to fall.

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Auto loans

Refinance your auto loan and get $100.  And what makes the deal even more attractive… the interest rate on used car loans are as little as 4.75% for 36 months.  The average right now is 7.14%.  At this rate, the savings can add up quick.  Also if you are in the market for a new car, you can get a great rate through Navy Federal.  The new car loan rate is as low as 3.75%.  That is about half of the national average.

Mortgage loans

Navy Federal offers an excellent rate on home mortgage loans.  The 30 year fixed rate is 5.375% with .75 points.  The going rate everywhere else… 5.97%.  That may not seem like much of a difference, but .6% makes a huge difference on a $500,000 or even $200,000 loan. And if you use a RealtyPlus approved agent to help you search for and buy your new home, you can get a rebate of up to $5,050 (depending on the purchase price).  This rebate also works if you use a RealtyPlus approved agent to help you sell your home.

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Even with all of the great products and low rates, the thing I like most about Navy Federal is that they offer free seminars to it members.  The seminar usually last 1 to 2 hours and center around different financial topics that are very useful.  They regularly host home buying seminars.  But other seminars focus on investing, estate planning, retirement planning, and taxes.

In addition to those few that I have mentioned, Navy Federal also provides services for small business and investment and insurance services. However, the only way you can benefit from what Navy Federal has to give is to become a credit union member. Until recently, membership was limited to only those with an affiliation with certain branches of the military.  However as of May of this year, membership eligibility has been expanded to include all branches.  So to join the Navy Federal Credit Union, you must be a civilian or non-civilian employee of the Department of Defense, be a Department of Defense reservist or be enrolled in a officer candidate program.  Else you must be a family member of anyone who fits into one of these categories.

Unfortunately, I am not eligible to join.  But if you are, you should seriously consider giving Navy Federal a shot.