Your Money: Caveat Emptor I
When I was a young fellow and working my way through Law School I worked in the Finance and Insurance Industry. This article is about your money and how to avoid traps that can cost you tens of thousands of dollars and becoming homeless.
First let us look at the economy of today. I am not pulling any punches. I believe for the past 28 years we have been hurdling downhill, living on our precious natural resources, which are now all but depleted. What is left is owned and exploited by foreign Swiss gnome bankers and the ultra wealthy elite who are unable to comprehend anything other than a luxurious lifestyle. For example, you are aware of the brazen “bailout” of the major investment banks, hedge funds, and the political maneuvering within the corrupt government of today. Twelve and one half billion dollars have been set aside for the payoffs to CEO’s, which include the staffs averaging six hundred thousand a year salaries.
They take their initial boondoggle and fly off on private Jets to Las Vegas and Europe for bodacious parties at your taxpayer expense.
It is obvious that the present administration was aware of this swindle and greed by eliminating the usury laws, the protective regulations developed from the Great Depression so that none of this would happen again. In addition, three years ago there was a rush to contain the emerging bankruptcies by changing the law. Principally of note is that in bankruptcy proceedings the primary residence is NOT eligible for bankruptcy relief. Could it be that there was an advance warning of the current fiasco? There has been a sell off of our grain reserves and now they are forecasting possible hunger for us. Promises of the FDIC to pay off any bank defaults by boosting the ceiling on deposits to two hundred and fifty thousand is a sham as they do not have the assets to meet the 8,300 banks in the USA. During the Great Depression 4,000 banks closed their doors; the economy was much smaller then. Currently we have 171 banks on the “watch list”. Twenty-Seven banks so far have no cash flow and have been restructured-merged; up 47% from last year.
I could drone on and on, the facts well documented, but the majority of the working class has become but zombies, mindlessly watching monitored filtered and moderated news on TV edited by Washington. Let us, at this website, discuss some of the scams of the big global greed.
Fifty years back when you went to a bank to get a loan, or to a Finance business you paid at the maximum 18% on one thousand dollars or less. This was the short-term rate. The long-term rate was 6%. So if you, as an example, bought a new car the teaser rate was the bank rate and as soon as you paid it down to the short-term rate you never got it paid off.
This was in the days before APR. What this means is that your billing cycle is not a 30 day monthly bill at a fixed rate but a billing cycle, perhaps on 23 days. This affords the lender more of your money in more interest payments per year. Avoid APR.
Another trap of course is the credit card. Currently fifty-one billion cardholders are in debt at least $5,000.00 per card. The new credit rules coming into play now is like sub prime scams. They will say to you,” we are upping your credit line to $10,000.00” and you bite. You run your dept up to the new limit thinking you are going to squeeze the payment at the old 10% rate. Surprise. They are raising the rates to 30% and reducing the borrowing rate, and you now have more to pay in interest PLUS you are in arrears, you have exceeded your credit line, and will have to pay penalties ad infinitum. This is a trap. Pay off your credit cars and burn them. Do not get sucked into the raised borrowers limit.
The credit mess now re-subsidized by Congress and allowing the banking system to lax the rules is the new panacea for greed. Expect the next crisis to be bailing out the credit card business within two to three years. I might add that the paradigm of finance in the USA, and now globally, is that we the consumer front 77% of the economy. The goal is to keep this going by putting you into deeper and deeper debt-debt is what is running and ruining this country now.
Homebuyers take note. Now is not the time to buy. For the most part the system is offering a teaser rate and an average 63% balloon payment within a one to three year based on page 43 of 51 pages of contract, the master copy held in some Swiss vault. A young couple I know of two years ago bought into the trap of the sub prime as they were disabled and on Social Security. They were sold a dump in the country and were happy until the full balloon payment came due. They could not pay it and pulled up stakes. The next part of the scam was that a lawyer offered to “help” them for $3,000.00 and get them back into the dump. Once back in they would have gone through the same process again, and again, and again. The lawyer would have made money-done nothing. These lawyers “help scams” are across the nation often farmed out by the US Government to help people, yet their profit is more in bankruptcy than in modifying a loan. The real estate agent-broker got his commission and moved out of state. Oh yes, the bank had sold the contract in a bundle to a Swiss bank consortium someplace in the Mid East, received its discounted profit and just managed the payments and transfer fees not suffering in the least and loss. Banks win-you lose.
Currently we have eight million homes in bankruptcy and this does not include the twenty some states that allow you to walk away without penalty, as in California. Some 1 in 7 homebuyers are in arrears; up from 1 in 8 in arrears, and it is expected when the balloon payments hit them this next 2009, you will be looking at three million plus, more homes in bankruptcy. This is tragic.
Good news from Washington DC is soft soap for the zombies. “Home sales are up”. Well, that is mostly based upon foreclosures and then being placed on the market. It is all in how you twist the wording. Believe nothing.
A stunning story of a woman being taken for a ride in the system as well as including a series of articles on the mess may be found at this link. Note that this woman, in the community center, lectured no doubt by a real estate charlatan did NOT disclose enough information for her to make a sound informed decision. Tens of thousands of people are in the same sinking boat. Keep in mind that the ethics of a realtor is that he owes you no allegiance, he owes his principal first and foremost that will be his commission.
If you have a small financial bundle, sit on it for a couple years-prices of homes are 25% devalued right now and will drop more. Expect a big drop of 35% or even more in costs in 2009. Do not think of your new home as a short-term investment which you can turnover for a profit. Think of it as a sanctuary for the next decade or more. Get some space with it for a garden-a big garden. Put in a wood heat system and private water well with your own septic. Get off the grid as much as possible.
“Caveat Emptor is the ancient saying, “buyer beware”. It is just as true today. Anytime anyone offers you a deal that is too good to refuse; it has strings. Back in the 1920’s the word of the day was “beware of the smiling stranger”. Still true. There is a biblical proverb:” Beware of the winking man”. Throughout history there are folk sayings to point out that what you see, what you hear that is so wonderful is a con. Nobody gives anything away for nothing. Imprint that.
Let us look at some insurance backfires for people. When you buy your house the bank wants to guarantee that their investment is safe in case of loss such as fire. So the real estate agent in order to keep your payments down, as a hook, offers you credit fire-damage insurance. This is a “decreasing term policy”. Some call it “mortgage insurance”. So let’s say you have a hundred thousand dollar loan against the property. You have been paying for 25 years; you’re getting old and the place burns to the ground. The bank will get the balance owed paid by the insurance company. You get nothing. I repeat: nothing.
You are aware of this risk. You go to a reputable insurance company that offers Home Owners Insurance. Keep in mind the shingle with Joe’s Insurance is not the name of an insurance company. Joe is an independent agent for several companies, some good, some bad, and Joe makes his living getting you hooked up. Joe may be honorable, or not. Let us assume Joe probably does not care-he wants the commission. You need to go to a shingle like: Farm Bureau, Farmers Group, Hartford-a major insurance firm. As an example: NOT a Texas underwriter.
So now, being better advised you have discussed with several different companies what you want covered. You want mortgage protection coverage if the house burns down, blown away, crushed under ice, or aliens take over. You also want the remainder of the $100,000.00 on the house, after the mortgaged is paid off, paid to you, or whom you designate in case of death. You want protection if your dog, or the kids bite somebody. You might opt for an “all peril” clause.
Even with a reputable insurance company if you are burned out you might not get anything.
This is how it works. All 7000+ insurance companies that offer fire insurance in the USA follow the 80% rule. This means-read this carefully now- “That at the time of loss, you must have sufficient coverage within 80% of the loss based upon material replacement and labor costs to rebuild.”
It does not mean beans if you pick a number out of the air what you “think” the value of the house is, or what you want, or your mortgage cost is. What determines the value of your property, the house and appurtenant structure such as a garage, (other building like your chicken house, barn, etc are separate coverages), is “at the time of the loss you are paying at least 80% of the cost of the materials to rebuild and labor- separately defined in writing. “
So first you want to hire a licensed building contractor to visit your house and estimate as a contractor what it would cost to rebuild the house for materials and labor, separately stated. This is what you may find to be surprising as costs are going up and taxes have nothing to do with the calculation. You have to have a letterhead contractor’s statement and a copy of his license. Copies of this are given to the insurance agent whose personal estimate is worthless in case you go to court.
Incidentally you do this at the time you are buying the house and before the ink is dry on the purchase agreement with the realtor. The realtor being the agent for the seller locks you into paying for the house even if it burns down BEFORE the deed is passed to you. This is a catch 22 in law and you need to protect yourself in this interim period of time.
The reputable insurance company will take this data and annually adjust your premium as their actuarial tables calculate how much your house is going up or down. Plan on up.
If you do not do this you will lose your shirt. Lets us use the example that you want coverage on your hundred thousand dollar loan- you’re assuming this is the value of the property. You pay for thirty years and you are at the last payment. The house burns down. The house has appreciated in building costs, and you no longer are at the 80% rule. You lose by being penalized for not paying what is legally just, and may only collect a few thousand. Maybe nothing. You signed the contract that you agreed to.
The insurance company is a business that manages its money carefully. They are legally right and you agreed. The agent can liable the company if you have it in writing, so they usually say very little.
Discuss this with a real estate attorney. File your records in a fireproof box. Next week we can look at some more aspects of saving money “in the long run” by knowing what is what.
Contact me at: firstname.lastname@example.org
Copyright: 2008, Back2theLand, Mark Steel.