2006 April | Wheatworks Blog: Financial Matters

Is CEO Compensation Too Rich?

4/20/2006, 5:02 pm

NBC Nightly News ran a piece tonight about CEO compensation.

It included an impossible sounding report that the average CEO takes home 431 times the compensation of an average employee. Surely this can’t be true. A quick calculation, though, shows it’s probable. Figure the average employee makes $45,000 per year and multiply that by 431 and you get an average CEO salary of $19,395,000. Let’s call it $20 million even.

Is your CEO’s work worth $20,000,000 a year? I’ll leave the answer to you. However, it concerns many that CEO compensation is often tied to things over which a CEO has no control instead of being tied to the actual impact of his or her efforts.

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Typical Mortgage Fraud Schemes

4/19/2006, 7:06 am

What do “Backward Applications”, “Air Loans”, “Silent Seconds”, “Nominee Loans”, “Property Flips”, “Foreclosure Schemes” and “Equity Skimming” all have in common?

They are all addressed by the Federal Bureau of Investigation’s Operation Quick Flip.

One of the fastest growing white collar crimes in the US is mortgage fraud. Information about Operation Quick Flip is available on the FBI’s web site describing what fraud is, what the consequences are of mortgage fraud and examples of how the FBI is actively pursuing mortgage fraud cases.

It’s interesting reading material at:
http://www.fbi.gov/page2/dec05/operationquickflip121405.htm

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What does ‘upside down’ mean?

4/18/2006, 7:53 am

You’ve probably read the phrase ‘upside down’ in a newspaper or heard it on the news when a commentator discussed the current real estate or automobile markets.

Being ‘upside down’ means you owe more money than what you’re buying is worth. For example, if you owe $250,000 on your home and it is worth only $225,000 you’re upside down. Or if you owe $30,000 on your SUV but it’s worth $23,000, you’re upside down.

How does it happen? How is it possible to owe more to a lender than your home or auto is worth? Here are a couple of ways it can happen:

125% Mortgage Loans

I just googled ‘125% mortgage’ and found 31,000 results. A ‘125′ is a loan in which the lender gives you 125% of the value of the home you are buying. If you want to buy a $200,000 house, the lender gives you a loan for $250,000. Lenders market it as a way to ‘get the financial freedom you need’ to pay off your debts and buy a house at the same time.

You’ve seen the ads: ‘Pay off your credit cards and reduce your monthly mortgage payment!’ Unfortunately, you home becomes collateral for all the debts you pay off. And because you owe more than your home is worth, you’re upside down.

Cash Out Refi Followed by a Decline in Home Prices

Instead of the traditional approach to financial stability in which one pays off their mortgage, many are currently using a ‘Home ATM’. They are withdrawing money against the increasing value of their home.

House values have appreciated irrationally in many areas of the country. People are refinancing their mortgages and pulling cash out by borrowing against their equity.

For example, imagine a person with a home worth $250,000. Through appreciation and making monthly payments, suppose they have $50,000 in equity.

They see the ads and hear their friends talking about their new found ‘financial freedom’. They jump on the bandwagon and refinance their mortgage for the full value of their home, $250,000. Instead of $50,000 in equity, they now have $50,000 more debt which is collateralized by their home.

The $50,000 they pulled out of their ‘Home ATM’ isn’t new money. It’s not ‘financial freedom’. It’s not a bonus. It’s not the result of a good investment. It’s $50,000 of additional debt they didn’t have before they refinanced. Ouch!

Let’s continue the example. Suppose the value of real estate in their neighborhood declines by 10%. Their $250,000 is now worth $225,000. But they now owe more than $225,000 because they used their Home ATM and borrowed against their equity.

They’re upside down, owing more than their home is worth. It’s not a good thing.

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Category: Financial Tips, Information | 1 Comment

50 Year Mortgages Are Here!?!

4/17/2006, 9:43 pm

Reliant Home Warranty Corporation announced today that it will be the first to market a 50-year amortization for subprime borrowers in North America. They also announced a 5 year blended mortgage (3 years interest only and 2 year P&I) for a 53 year loan!

In today’s financial environment that offers so many odd, exotic mortgage options, I like to compare them to the good ol’ standard, a 30-year fixed rate mortgage. (Regardless of what you hear on tv or read in the newspaper, it’s hard to beat a 30-year FRM.)

Here’s how a 30 FRM compares to a 50 for the purchase of a $250,000 home.

Let’s start at HSH Associate’s web site to get today’s national average mortgage rate. It’s at 6.61% for a 30 year FRM. The monthly payment (principal and interest) required to amortize a $250,000 purchase at 6.61% for 30 years is $1,598.30. (The quick way to compute this is to use Loan Spread Calculator Pro!)

The monthly payment on same loan for 50 years is $1,430.04. Subtract this from the $1,598.30 and it looks like you’ll save $168.26 each month by getting a 50 year loan instead of a 30 year loan!

Multiply that $168.26 by 30 years of payments and it looks better. It sure looks like you’ll “save” $60,573.60 by getting the 50 year mortgage. The problem is that while you’ll save more than $60,000 in monthly payments, you’ll still have 20 year left on the 50 year loan!

And remember those 20 years require monthly payment sof $1,430.04. In other words, you will still owe $343,209.60 on your $250,000 house! In fact, during the 50 years of your loan, you’ll pay a total of more than $858,025 for your house.

The 50 year loan will cost you $282,637 than the 30 year and take 20 more years to purchase.

Doesn’t really make sense, does it? Use Real Estate Calculator Suite to check the numbers for yourself.