Get Rich Slick

So I have a family member that is interested in purchasing a home.   They asked if I could join them at the mortgage  brokers office to look over the documents and make sure there wasn’t anything weird going on with the process.    First, I have to give you a bit of a background and you’ll understand why we ended up here.

A few weeks ago, person x found a home they were interested in purchasing.   Person x asked for my help to look at the property and share some thoughts on the possible purchase.   I drove over, checked out the home and thought it was a reasonable deal.  Nothing out of the ordinary in my opinion until……I got a call from person x a few days later saying the Realtor suggested a particular mortgage broker.  We’ll call mortgage broker “Greedy Selfish Bastards Mortgage Broker” or GSBMB for short.

Immediately alarms went off in my head.   Hmmm…Realtor suggests mortgage broker….where have I written this story before?   So without going into a long convoluted story, the quick summary is that GSBMB came in with a ridiculously high loan rate, ridiculously high fees, and ridiculously high selfish greed.   So person X is advised to get someone else by another family member to comparison shop.   Sure enough, the second mortgage broker (SMB) is a bit cheaper because Person X gave them a COPY of what GSBMB  and they reduced the fees, interest and lowered their greed (a small bit).

I come into the story when Person X is heading over to SMB to sign some paperwork.  We get there, I sit down and start looking at all the paperwork and that’s when I go “ugh” and sigh a bit.    I immediately start off by asking why there is $1000 in fees for doing nothing more than shuffling paperwork and the response from SMB agent is immediately, “it’s cheaper than what GSBMB was charging and Person X is getting a great deal.”

Now if you paid close attention, you’ll note that the fees were still high just not as high as GSMBM which made Person X feel better but it’s still a big waste of money.   Unfortunately, Person X is too busy and too much in a hurry to take a step back and consult with another bank or broker and simply wants to get the deal run.  The meter is also running on their contract and they have to close within a particular date and time is dwindling away.

Person X signs the paperwork and we go to lunch.   “What do you think?” is the question I get and I respond, “You were in a hurry and probably paid an extra $2,000 for this home that you didn’t need to spend” is what I say back.    At the end of the day, we both agree that the interest rate is irrelevant because Person X plans on paying off the mortgage within a year or two so it’s no big deal but the fees are pure profit for the worthless mortgage broker.  As best I could tell, the SMB was making at least $3,000 in profit for doing virtually nothing but signing paperwork.

At some point in the near future, I suspect technology will overtake the real estate industry.  We’ve seen companies like Redfine and Zillow start chipping away at Realtor commissions of 6% (ridiculous) and some enterprising young man/woman will come up with a system to automate the whole process.   With the advent of things like Google streetview, Google earth, automated property tax records there is no reason why appraisals can’t become more automated and there really is no reason for the existence of real estate mortgage brokers anyway since you can go to places like Lending Tree or BankRate and get quotes for loans from most banks.

So to all mortgage brokers, I hope you’ve enjoyed the quick and easy cash but it’s all going away over the next generation or so and you will go the way of the dinosaurs!

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I went to make a few deposits today and I overheard two bank reps speaking stating that there is (or perhaps already exists) a plan to partially cash checks and give the remainder of the funds to a customer back on a debit card.  I didn’t hear the full details but I’m guessing if you walk in with a check for $2,000 you might get $500 in cash and $1,500 on a debit card.

I couldn’t believe my ears!   Is this how the Federal Reserve and banks are going to solve their solvency issue?    It makes perfect sense because there are many things you probably don’t know about banking.

First there is fractional reserve lending by which a bank who receives a savings deposit of say $1,000 can turn around and lend out $9,000 and charge interest to make a handsome profit.   Of course the deal got a whole lot sweeter when the Fed let banks use “sweeps” to increase the stated reserves of each bank.    What this means is that if you deposit $1,000 into your checking account, the bank isn’t suppose to use that money and count it toward their reserves because a customer may spend that money at any point in time.   Through the miracle of “sweeps” though, the Fed allows banks to “sweep” the $1,000 in your checking account into a “savings” account and count that as part of their reserves.

So now, instead of having $1,000 to base their deposit reserves on, the bank has $2,000 of  “stated” reserves and basis their fractional lending on $2,000 to lend out $18,000.     But what happens when customers no longer have jobs and no longer deposit money and actually write checks and spend their money?   The whole thing unravels rather quickly and the new trick of the trade seems to be to partially cash a check you get and issue you the remainder of the balance on a debit card.

Guess what the bank gets to do with the debit card funds?   You guessed it, they get to lend out that money, charge interest, and make a nice profit with your money.   What a world….

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Yesterday I wrote about my credit lines being cut but it’s not important anymore because I’m predicting the demise of FICO.   I’m on record as having a great disdain for credit reporting agencies and I’m glad to see change is coming.  We are clearly in a new banking & lending environment and will be so for the foreseeable future so let’s take a look at a few variables that will contribute to the demise of FICO.

Issue #1 – Either Congressional action or Comptroller/Fed rules are going to make banks change some of their business practices.  Specifically, banks will no longer be able to raise rates on universal defaults.    So how does that hurt FICO?  Because banks can’t use universal default to raise interest rates, banks don’t have to pay to monitor consumer accounts monthly anymore.   Why bother checking if someone is late on another bill if it doesn’t impact the bank?   The bank already knows if you’re late or not so why pay for that service?

Issue #2 – Banks are more concerned with verifiable employment (and history) and current income (and history) and cash available before underwriting any new major loans, FICO score seems to have moved to the bottom of the rung so why pay a premium for this information when it only impacts 10% (assumption) of the underwriting standards?  The only thing banks might need to see on a credit report is outstanding debt.

Issue #3 – Trust.  There have been so much “tweaking” and “system gaming” that FICO has taken a credibility hit.  Why are we in this financial crisis after all if FICO was supposed to keep bad loans from happening?  Wasn’t FICO such a marvelous system so optimized and tweaked that no bad loans could ever be written with this system?

Issue #4 – Self – Reliance.   Because banks made so many bad loans, it will behoove them to consider creating their own credit standards and reporting mechanisms rather than relying on FICO.   We are entering a new regulatory environment and you can’t keep doing the same thing and expect different results; that’s insanity!

Issue #5 – Consumer sentiment.   Let’s face reality here, no one is buying cars, houses or much of anything else so consumers don’t care about their credit scores because they have no plans on buying anything.   Commercial consumers don’t want FICO and public consumers don’t want their credit scores so who’s going to pay?   People across the country continue to get their credit lines cut and invariably their credit scores are dropping so why care?  There’s nothing a consumer can do about a bank arbitrarily cutting consumer credit lines so FICO scores are not only wrong, they’re pointless.

My best guess is that FICO has about 18 months of life left in it based on deteriorating economic conditions.   It may be acquired by a bank or a credit agency or be replaced by something more innovative.   In any event I won’t be shedding any tears for FICO.

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In the never ending saga of the city trash collection schedule, I’ve reached a point where I’ve technically become a criminal.  At least, I think it’s criminal to dispose of trash the way I’ve resorted to doing these days.

For a quick primer, the city used to pick up trash twice a week and heavy trash every Friday in my neighborhood.   The city did this during what I call the “golden age” of trash collection about a decade ago.   Over the years, the city changed the trash pick up schedule (for the worse) and has now released a new schedule:

Heavy trash will be picked up every OTHER MONTH on the second Friday of the month while tree/yard waste (recyclable) will be picked up in alternate every other month.  Essentially what this means is that if I decide to trim my trees say next week, I’ll have to wait until sometime  in JUNE before the city will pick up  the tree limbs.   Alternatively, if I decide to trash my grill or some other large object (water heater) I’ll have to wait till May and if I miss that window because I’m on vacation or out of town, I’ll have to wait until JULY to get rid of heavy trash.

The city has also all but abandoned recycling now so paper, glass and other items that used to be recycled are now going back into the landfill.    So where is the criminal in all this?   I decided to sign up for a second trash and I basically fill the second can with whatever garbage I can fit in there:  tree limbs, grass, glass, heavy trash, you name it!

Technically, I don’t think tree/yard waste is supposed to go into the garbage truck but what else am I supposed to do?   I am now a criminal and playing a dangerous game of trash roulette.   I’m sure one day I will likely get a fine and then the city will decide that fining people for “bad” trash will be a great new income revenue stream and there will be garbage “officers” looking for a way to fine citizens for inappropriate trash in bins.

Once that day comes, I’ll be buying a large barrel and burning all my trash and I’m sure many of my neighbors will be joining me in a great trash revolt.  By the way, I’m paying $10/month for that extra trash can so I’m basically paying $120/year to get rid of trash when it used to be free.  This is yet another reason to not buy/consume anything these days because eventually it will get trashed.

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Did you buy a house during the housing boom?  The drywall in your boom home may contain poisonous Chinese drywall.   Did you furnish that home with new furniture?   That furniture may contain Chinese chemicals that harm your skin!

It looks like the Chinese poison train continues to chug along the United States from coast to coast.  I made a vow to stop buying anything from China a while back and part of that strategy included not purchasing anything from Wal-Mart or anything with a label that reads, “Made in China” no matter how “cheap” the product is and this is the reason for it:

PARKLAND, Fla. (AP) — At the height of the U.S. housing boom, when building materials were in short supply, American construction companies used millions of pounds of Chinese-made drywall because it was abundant and cheap.

Now that decision is haunting hundreds of homeowners and apartment dwellers who are concerned that the wallboard gives off fumes that can corrode copper pipes, blacken jewelry and silverware, and possibly sicken people.

Shipping records reviewed by The Associated Press indicate that imports of potentially tainted Chinese building materials exceeded 500 million pounds during a four-year period of soaring home prices. The drywall may have been used in more than 100,000 homes, according to some estimates, including houses rebuilt after Hurricane Katrina.

“This is a traumatic problem of extraordinary proportions,” said U.S. Rep. Robert Wexler, a Florida Democrat who introduced a bill in the House calling for a temporary ban on the Chinese-made imports until more is known about their chemical makeup. Similar legislation has been proposed in the Senate.

The drywall apparently causes a chemical reaction that gives off a rotten-egg stench, which grows worse with heat and humidity.

Click here for full article.

AN unexplained rash could be a sign that your couch is making you sick.

A toxic fungicide in imported furniture is behind an outbreak of chronic dermatitis, skin burns, eye irritation and breathing difficulties across the world. Medical experts here are warning consumers to watch for symptoms.

The international journal Allergy has confirmed what thousands of British and mainland European citizens have known for more than a year: new leather sofas imported from China are a hotbed of allergens.

Click here for full article.

And if you’ll recall, China has sent over poisonous fish, toys, contaminated pet food, and many other items we’ve yet to truly know are poisonous.   Years later, the US government still lets poison through to the consumer from places like China and people don’t understand why their kids get sick or strange illnesses.   This is also part of the reason why I’m growing my own food in limited quantities for now.

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No doubt at some point you’ve encountered a person with a sign which reads, “Will Work For Food” and as I left the gym yesterday, I noticed a limo near the exit.  The chauffeur of the limo rolled down his window and asked if I was Mr. Black and I waved him off so he went back to his cell phone and rolled his window back up.

After that simple 10 second interaction the following thought popped into my head, a destitute man with a sign reading “Will Work For Will” with the implication being that in the near future, we all might be wearing signs that imply we will work not for food or actual money but for the potential of receiving something in a person’s will.

The reason the thought popped into my head was because I couldn’t understand why there was a limo waiting for someone at the gym.  The gym I attend isn’t known for catering to star athletes or movies stars but generally older people as there is a physical therapy department in the gym.   It occurred to me that an elderly person had called for the limo and the driver was waiting patiently.

As the gap between rich (super rich) and poor continues to grow and as we plan on seeing 78 million boomers retired I’ve been contemplating what business opportunities might be on the horizon.   I seriously doubt boomers will be driving themselves much in the future.  Illness, insurance, fuel and physical ability will limit most boomers mobility so there may be a boom in driving services in the future.   I seriously doubt people will be able to afford their own personal chauffeur so it makes sense that a driving service may be the sensible way to go.

The business model is simple:  personal driving service at the cost of a common taxi service.    The pricing model:  unknown.

The reason why I think this would work is because I foresee the elderly “bundling” their mobility needs into trips to the gym, grocery, salon, and perhaps movie on particular single day or two vs. frequent trips daily.    The taxi model doesn’t work for going to three or more location on a single day it is too cost prohibitive and a permanent chauffeur and driver is too cost  prohibitive as well for most so a hybrid solution is needed.

Unfortunately, after thinking this through and getting excited about the prospect it occurred to me that most boomers are broke and perhaps the model won’t be supported at all.  It was then that I thought the next big thing is to provide work and services on a “Will by Will” basis.   As soon as a boomer dies, you get some or all of the assets left over kind of like a lien on life for providing services to the elderly.   I think that’s what the world is coming to and we may all have signs that read, “Will Work For Your Will.”

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I’ve been conversing with a few people and talk of the “credit card nuclear option” seems to be coming up more and more these days.   What is the credit card nuclear option?   Well, if you’ll recall from this post, it is essentially taking cash advance(s) from your credit cards to the max or near max with no intention of ever paying back the money.    The goal after taking the cash advance money is to pay off outstanding debt on tangible but protected (non seizable) assets.

For example, let’s say you have 100k in credit lines and have 100k left on your mortgage, the goal would be to take the 100k cash advance then use the proceeds to pay off your mortgage and finally file for bankruptcy at some point in the future.    This plan only works in certain states however depending on the laws in your state.   In some states, I think your home can be seized or lien placed on it to recover the funds but in other states, a home can’t be touched.

This also works really well to get rid of student loans.   If you file for bankruptcy, student loans ARE NOT forgiven and you will still owe the amounts on this debt BUT if you take out a credit card cash advance, pay off your student loans, THEN file for bankruptcy there is no recourse.    The student loans are gone forever and the bankruptcy will be gone in 7 to 10 years or so.

I’ve spoken to a good friend who runs a small business and he’s heard from some of his small business customers that they are exactly planning on doing the credit card nuclear option if things get much worse.   Interestingly, he’s told me elaborate stories of how these “nuclear options” are meticulously constructed to ensure that the trails all go to dead ends (i.e. no possibility of recovery).    Obviously, I won’t post details on how to do that but it’s very interesting at the ingenuity of the “free market” system to come up with these scenarios.   Clearly, small business owners are taking their cue from their big business counterparts and gaming the system just like big corp.

I can’t blame anyone for taking this approach if their situation is dire.  Would you want to live in a tent city or homeless shelter or use the nuclear option to keep your home and simply file for bankruptcy?   If I were saddled with 30k or more of student debt, I would probably take this approach to get rid of my student loans if I were on my way to bankruptcy.

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I get a large array of calls from debt collectors looking for people that have the same name I do but owe someone, somewhere money.   Lately, I’ve been inundated with debt collectors calling me and asking if I know my neighbors phone number!

Here’s how one call went recently.

Phone: Ring…Ring…Ring

Me: Hello?

Phone: Hi, do you know XXXXXXXX, he lives next door to you?

Me: Excuse me?  Who are you looking for?

Phone: I’m looking for XXXXXXX, he’s your neighbor right?  He lives at XXXX street and you live at XXXX street next door right?

Me: I guess so but I don’t know my neighbor that well (neighbor barely speaks English).

Phone: I want you to give him this message……and tell him to call me.

Me:  What?  Are you serious?  I don’t think that’s a good idea and I’m not a messenger service .

Phone:  But do you know him, I want you to give him the message!

Me: If you know where he lives, SEND HIM A LETTER AND ASK HIM TO CALL YOU!

Phone: OK, bye.

I figured that would be the end of it but the caller called back again and repeated the same script.   I told her to stop calling me and that she was breaking the law by doing so.  She quickly hung up but I suspect I’ll be getting another call soon from this person again.

I can only imagine that as the subprime loans, credit card dead beats, and other debtors descend into poverty that the collection calls are going to increase dramatically.

So I came up with a business idea.  Someone needs to create a company that will send a blanket cease and desist letter to ALL the debt collection agencies around the United States and offer a preemptive “cease and desist”  service for a nominal fee.  I don’t owe anyone any money and even if I did, the last thing I would want to do is talk to a debt collector over the phone so why not take a preemptive strike.   Some enterprising young man/woman might even make money out of the deal by suing the company that violates the cease and desist order and keep the fees or awards issued by a court.   Someone could combine this service with Grand Central service to pre-screen and route violators to the service!

I would sign up for this in a minute as my phone rings constantly from debt collectors looking for deadbeats with my same name.

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I finally received my unemployment money in a form I didn’t expect.  For some reason, I assumed I would be getting a check that I would take to the bank and deposit but instead I got a Visa debit card.   It was a bit bewildering but after I thought about it for a few minutes I began to understand the scam.

First, by issuing a debit card instead of a check, the partner bank gets to keep/hold on to your money until you spend it.   Most people won’t bother going to an ATM and pulling their money out if they can spend it off the card.   Besides, there is an ATM fee for withdrawing money.   You’d think the State would waive the fee or force the partner bank to waive the fee but the disclosure packet clearly states that ATM’s charge fees which are deducted from your account.

Second, if a person chooses to use the debit card or pulling the money out via the ATM, there will always be some type of residual money left on the card.   For example, let’s say there is $400 on the card and you go to an ATM to withdraw the money.  The ATM charges a fee of $2.50 to withdraw funds and only dispenses money with $5 as the smallest denomination so how much can you withdraw?  $400 – $2.50 (ATM fee) = $397.50.   Since you can only withdraw in round lots of $5, the most you can withdraw is $395.00 leaving $2.50 on the card.

The question arises, how can you withdraw $2.50 from the card?   I told my brother about the “scam” and he said he would take the card to the gas station and put $2.50 of gas but I’m not sure if this works since the gas station typically pre-charges or pre-authorizes a certain amount.

So the State has the scam worked out fairly well.   If there are 100,000 people on unemployment and there is on average a residual $2.50 amount left on cards that’s $250,000 of money left available to the state or the bank in residual cash left over.   I’m not sure if ALL states do it this way but if it were the case and we have 4 million people unemployed then this would translate into $10 million dollars across all states in additional left over residual cash.

My plan after I activate the card is to go over to my bank and find out if I can withdraw a specific amount without incurring a fee, I might give the card to the teller and ask him/her to “charge” the full amount that should be in the card and transfer the cash to my account.    What a world, what a scam…..

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So it’s been a week since I’ve been termed and the week went fast, so fast that I just realized I need to do something about health insurance. I received notice that if I want to continue my health insurance plan on COBRA, I can kindly cough up $1,400 per month for the privelage of being “insured” against some potential health problems.

So what does $1,400 mean to me? Well, that is more money than my mortgage even when I hadn’t paid any of it down. The monthly payment on a $240,000 home financed at 6% for 30 years would be $1,438. Would you rather have a home or have health insurance.

This would be the equivalent of THREE new car payments of $466.67.

If I took $1,400 a month and invested it at 6% for 30 years, I would have $1.4 million at the end of 30 years.

We’ll likely go on my wife’s insurance plan but it doesn’t escape me that we may suddenly become part of the millions of uninsured people out there if she loses her job. I wonder what would happen if corporations stood up to the health insurance industry and simply said, “we’re not paying these insurance premiums anymore!”

I would imagine most health insurance companies would immediately go bankrupt. I would imagine that health care costs would deflate rapidly as well. Those $12 bottle of aspirin would suddenly compete with $0.99 Walgreens generic brand.

Someone needs to do something, we need change. If only we had leadership that could change this mess.

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