frugal underground

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I’ve been reading with interest Millionaire Mommy Next Door’s recent posts on renting vs. owning. She makes some very good points that run counter to a lot of people’s emotional decisions, and honestly, if I wasn’t already committed to owning (we started buying our house before the bubble made things crazy and have an extremely low interest rate), I’d seriously consider renting instead of buying in order to make better use of the dollar difference. As it is I’m encouraging my sister and brother-in-law to think carefully about it.

Since I’ve been thinking a lot about the topic, a Springwise post this morning caught my eye; it’s about a site called Rentometer. It was originally created for property owners, to help them figure out what a reasonable rent rate is based on the basic characteristics (number of bedrooms) and neighborhood.

Naturally, the site has also found success with renters themselves who want to know if what they’re paying is reasonable. I ran it on my sister’s apartment and it said that their rent is comparable for the neighborhood.

I particularly like the visual aspects. The little gauge makes it easy to see the spread, and the Google map is specific enough that it could actually be helpful when apartment-shopping. One thing my sister and I noticed is that it doesn’t seem to take into account things like how new the rentals are or what specific features, so it’s really just a general tool, but it seems like a pretty helpful one.

I just read a very sobering article that is documenting the woes of some families who have interest-only mortgages or adjustable rate mortgages (ARMs). I highly recommend reading the whole article (especially if you’re in this situation or know people who are, because there are resources mentioned at the bottom that might help) but here are some compelling quotes.

Now, the real estate market is cooling, interest rates are rising and tens of thousands more Americans are starting to have trouble paying their mortgages. Nearly 25% of mortgages - 10 million - carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association.

Did you get that? 25% of mortgages nationwide. It’s even worse in some areas:

What worries experts such as Christopher Cagan at First American Real Estate Solutions are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That’s the highest such rate in the country.

And it’s already starting to bite the homeowners:

Already, in West Virginia, Alabama, Michigan, Missouri and Tennessee, about one in five homeowners with a high-interest (subprime) ARM was at least 30 days late at the end of last year, according to the Mortgage Bankers Association. After 90 days, the foreclosure clock starts ticking.

Here’s the unfortunate conclusion:

Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won’t be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan’s research.

Serious stuff. As someone who has been expecting this, my goal is still to pay off my own (fixed-rate!) mortgage as soon as possible and hopefully be in a situation to invest wisely and help people avoid foreclosure.

How will this affect you?

Some of you may be familiar with private mortgage insurance (PMI). With most types of mortgages, if you finance more than 80% of your home purchase, you are required to purchase PMI, which is not for your benefit but for the benefit of the lender. If you default on your loan, the lender is protected by the insurance. It makes sense since people who aren’t heavily invested in their home are more likely to default than those who have a lot of money in their house.

Just because it makes sense doesn’t make it fun to be paying for insurance that doesn’t really benefit me, though. We bought our house with 3% down, so we’ve been paying for PMI for a couple of years now. We have an Excel spreadsheet that we use to play with the numbers, you know, to see what an extra lump sum payment now will do to our final payoff date, or see how increasing the monthly payment by a few dollars impacts the long term picture. One of the things in our worksheet is our “no more PMI” date, and it was exciting to see it getting closer and closer. Home values have been going up here (just like everywhere else) so we thought about getting the house reappraised to get us over the 20% mark, but we were close enough that it wasn’t worth the appraisal cost.

As it turned out, we sold some stock and paid a big chunk on the mortgage in November, and that took us right past 80% equity to 77.5% in December. So my responsible husband called up ABN AMRO, our mortgage holder, and requested that PMI be cancelled (he also discussed another, unrelated issue). The nice representative confirmed that we were eligible to have it dropped and told him she would submit a request for an official evaluation. We were happy. No more paying for someone else’s insurance!

And then. January came, and our autodraft mortgage payment was transferred, and the chunk for PMI was taken right with it. We thought it was just a fluke and gave them the benefit of the doubt. Only they took the PMI payment in February, too. Grrrr.

My husband called them up again, cited the December phone call (we’ve learned through hard experience to keep detailed notes of all such calls). They looked it up, and informed us that there was no mention of our request in the call notes. Great! Daniel thought he had seen something on their site in the past about PMI being automatically cancelled at 22% equity, so he mentioned it. The rep didn’t know anything about this. Okay, fine. Daniel was pretty annoyed by this time, and became more so when the rep said we had to send in a letter requesting cancellation. We got the mailing address and the fax number.

In the meantime, while Daniel was on the phone making friendly remarks like “that’s quite the scam you’re running”, I started doing some research online. Unfortunately, he’d just hung up when I found really good, detailed information about the Homeowners Protection Act. Imagine my surprise to find out that, as best I can tell according to federal law, ABN AMRO was legally required to have cancelled our PMI—and didn’t. Here’s a summary of the applicable part:

Your private mortgage insurance, if paid by you directly, will be automatically cancelled when:

* Your mortgage balance is scheduled to reach 78% of your home’s original value (as determined by your loan’s initial amortization schedule), and
* You are current on your payments.

Interesting, huh? So we reported ABN AMRO to the FDIC and the FTC, and feel much better. We’ve also requested a refund for the amount taken for PMI in January and February. Will we get it? Who knows. But if ABN AMRO holds your mortgage, I’d highly recommend keeping a close eye on them.

ABN AMRO happens to be the bank holding our mortgage, so a few things have caught my eye recently.

First, we recently received a letter from them telling us that we were among the 2 million customers whose data is on a tape that was lost in transit to a credit reporting bureau. This wasn’t exactly good news (considering our social security numbers and other rather personal information was involved), but it seemed to be a mistake that wasn’t the bank’s fault (DHL actually lost the data) and they were trying to make it right by offering a free 90 days of credit monitoring.

Now the latest news is that the tape was found (yay!) at the same facility where it was lost (oops?). According to the article, ABN AMRO is extending the 90 day credit monitoring offer for a full year. I might actually bother to sign up, assuming there aren’t any crappy auto-extensions.

While I’m happy about the tape thing, I’m a little disturbed by other ABN AMRO news: US fines ABN AMRO Bank $80 million. Apparently they aren’t doing a good enough job of preventing money laundering. Of course, I’m generally opposed to money laundering, but I’m more annoyed that they are getting fined. Clearly, if other banks are not getting fined, this is preventable. $80 million may not be that much to a bank, but they’re going to have to cover it somehow, and as one of their customers, I don’t like that. One way or another, expenses get passed on—if not to me, then to some other customer some other day.

Of course, this whole post really doesn’t have a “good” action step, because the bank is the one with the loan and therefore the power. I just keep paying (and as long as it’s according to the terms I signed on with, I’m fine with that). I just hope that ABN AMRO doesn’t have any more mishaps!