Fannie Lets Foreclosed Renters Stay

Foreclosure Averted!Fannie Mae announced today that it would allow thousands of tenants remain in foreclosed homes as long as they stayed current on their rent. About 4,000 renters signed new leases and were permitted to stay in their rentals even though the property’s owners had been foreclosed on. While it turns Fannie Mae into a landlord, something it’s probably ill-equipped to handle efficiently, it’s probably the first action they’ve done in a long time that has made people smile.

The reason they’re doing it is because it makes financial sense (and they were forced to do this by the $700 billion Emergency Economic Stabilization Act). In a hot housing market, a foreclosed home can be sold fairly quickly. In the current housing market, foreclosures can sit for months, slowly (or quickly) eroding in value. By letting renters stay in those homes, instead of evicting them, Fannie Mae can leave those properties on auto-pilot and worry about the rest. Also, as someone who has considered buying rental properties, an occupied property is more valuable than a vacant one. It’s unorthodox but we live in challenging times.

I’m also glad renters aren’t getting screwed because their landlords were financially irresponsible. The renter shouldn’t be punished because the landlord made a mistake. I once knew a guy at one of my former employers who owned four homes during the housing boom. He would buy them with a low rate ARM, wait a few months, then use whatever equity he had built up to buy another. I used to hear me argue all the time on the phone with tenants about broken water heaters and I had no doubt he was a miserable landlord. Well, I heard now that all those properties are behind and now those tenants would probably be evicted.

One of the benefits of owning your home is control. When you own a home, you are in control. It may not seem like it sometimes but you truly do control your destiny, more so than if you are a renter. Unless you agreed to an ARM, your mortgage payment remains the same each year (it may go up because of taxes, but the principal and interest are the same). You won’t one day discover you have to move because your landlord was foreclosed.

That being said, I’m glad 4,000 families won’t have to be searching for a home in the winter. What do you all think of this?

(Photo: respres)


The Fate of GMAC Bank

GMAC Insurance Orange HummerDec 26. GMAC Bank was approved as a bank holding company but may have failed to clear a final hurdle to receive TARP funds.

GMAC, which stands for General Motors Acceptance Corporation, is the financial institution that offers loans to customers and dealers of General Motors, one of the Big Three seeking financial assistance this past week. In 2006, GM sold 51% of GMAC to some private equity firms, including Cerberus Capital Management LP (they also own all of Chrysler). GMAC Bank is a subsidiary of GMAC and GMAC is in a bit of trouble. ACtually, it’s in a lot of trouble. This week, GMAC ” sweetened terms on a debt swap designed to save the firm from bankruptcy and extended the deadline for a fourth time to lure more investors.” (Bloomberg) GMAC is trying to convert to a bank holding company so that it can get access to the TARP bailout funds, but is coming up short.

GMAC Bank, the subsidiary, is fine but it leads many to wonder what would happen to the bank should its parent, GMAC, fail. If history is any indication, everything should be fine. Lehman Brothers had a subsidiary bank, Lehman Brothers Bank, FSB, and according to Ken at BankDeals, the bank wasn’t included in the bankruptcy and is operating as normal. Lehman Brothers filed for bankruptcy in September of this year.

If you’re an account holder, your funds under the FDIC limits are perfectly safe. If you have over the limit, I would play it safe and get under the limit. There are no signs the bank itself is in danger but there’s also no reason to have above the FDIC limits ($250,000 through December 2009, otherwise it’s $100,000).

If you aren’t a customer and you are tempted by their certificate of deposit (CD) rates, I’d wait. I’m not a fan of opening accounts at struggling banks because if there is a problem, they often drop their rates immediately afterwards. CD rates don’t have to be honored when another bank assumes them following a failure. You can afford to wait a few weeks to see how things shake out.

I would expect that GMAC Bank will be fine, even if GMAC fails. If they aren’t, FDIC will protect your assets.

(Photo: femaletrumpet02)

 Your Take 

Your Take: All These Bailouts…

Toyota PriusI’m getting a little tired of reading about all these bailouts. In fact, I’m so tired of it that I debated even offering this up as a Your Take! However, I felt that it’s the news of the day and you all probably want to vent your feelings and frustrations about it. As I write this, the House has approved a bailout measure and it appears that Senate Republicans are going to block it unless some significant changes are made (heck, they didn’t even participate in the meetings).

Incidentally, the bailout appears to be dead in the Senate.)

I personally think that the companies should be allowed to go bankrupt, restructure their contracts, and then leave bankruptcy able to compete better financially. I don’t think bankruptcy automatically means one of them will disappear and millions of jobs will be lost. Look at the airline industry, how many of those airlines have been in and out of bankruptcy? They were able to renegotiate with the unions and come out leaner than ever. Incidentally, airlines are now calling for some economic stimulus too, to upgrade the aging airport and ATC infrastructure (which is sorely needed).

What do you think about all these bailouts?

(Photo: six27)

 Personal Finance 

AIG’s $443k Party to Celebrate $85B Bailout

It’s absolutely insulting that AIG spent $443,343 on a retreat just days after the Feds bailed out the company with a $85 billion infusion that sucked 80% of the firm away into the Federal abyss.

It’s my personal opinion that C-level executives are overpaid by the conventions of mere mortals but the reality is that their salaries and benefits are the result of what the market will and can bear. Goldman Sachs CEO earned $74M last year, Lehman Brothers chief Richard Fuld defended his $71.9M payday (it wasn’t as much as before the bankruptcy though!), and ex-CEO of Bear Stearns James Cayne earned $49.31M over the last two years. It’s an ungodly sum of money, especially for companies that are either dead or on life support, but that’s how the game is played. You take the heat with one hand and the cash with the other.

What AIG did? Spending nearly half a million on a retreat at the St. Regis Report in Monarch Beach? That’s like someone spitting in your face. If I had any business with AIG, I’d seriously reconsider it.

Rock Out With Your Bailout [The Smoking Gun]

 Government, Personal Finance 

The $700B Bailout Bill (Update8)

Update8: It’s done, both chambers have approved the updated bailout bill that contains a ton of other stuff… House Republicans got what they wanted. Bush just signed it.

Update7: The Senate will vote today, after sundown in observance of Rosh Hashanah, on a tweaked version of the bailout bill that the House rejected on Monday. There are a couple changes to it, none of which really affect the terms of the bailout itself but could sweeten the pot for House Republicans:

  • The FDIC insurance limit to be raised from $100,000 to $250,000.
  • Renewable energy tax incentives for individuals and businesses – this is something the Senate hopes will help get some House Republicans on board. (details)
  • Alternative Minimum Tax relief.

Update6: The bill didn’t pass the House. Back to the drawing table, lawmakers are working on a new bill.

Update5: The details of the agreed bailout bill have been released and they are:

  • As mentioned earlier, the $700 billion would be disbursed in stages with $250 billion made available immediately.
  • If the Treasury pays fair market value and if they overpay, the President would have to propose legislation to recoup the loss from the financial industry. The Treasury could also take ownership stakes in bailed out companies.
  • The government can adjust the mortgages that it takes over.
  • Executive compensation for firms that participate will be capped and companies can’t deduct any pay above half a million dollars. No golden parachutes for the top 5 executives of a company that goes into bankruptcy or if they fire those executives.
  • There will be two oversight board. The Financial Stability Oversight Board would protect taxpayers and the economic interests of the company. It will include the Fed chairman, the SEC chairman, the Federal Home Finance Agency director, the HUD secretary and the Treasury secretary. The second board is a congressional oversight panel that would review the state of the market, regulatory system, and the Treasury’s use of the funds. That panel would consist of 5 experts appointed by House and Senate leaders.
  • The Treasury must also establish an insurance program, with premiums paid by the industry, to guarantee the assets that were purchased before March 14th, 2008.

All that remains is the vote in both chambers and the President signing the bill. Whew.

Update4: A deal has been reached and all that remains is to put it on paper. The plan, according to a release by Speaker Pelosi’s office, stated that the plan “gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full — if other protections have not actually produced a profit.”

The $700B would be broken up into three phases: $250B available immediately, $100B “upon report to Congress,” and the last $250B available upon Congressional action. There are additional details in the WSJ article.

Update3: It appears as though the once 3-page bailout bill has now gotten up to 102 pages but progress is being made and now the ETA appears to be Sunday. I don’t know about you but for once I’m glad a bill swelled in size, the thought of $700B in spending passed in a mere three pages was a little disconcerting (not to mention there was no oversight!).

Update2: Uh oh, looks like there have been some problems. From the front page of CNN: “Sen. Richard Shelby, ranking Republican on the Senate Banking Comittee, emerged from the White House to declare of the bailout plan: ‘It will not solve problems, it will create more problems.'” Yikes! But it sounds like only the House Republicans are having problems with it

Update1: Reports are coming in that an agreement in principle has been reached. According to the Wall Street Journal, the $700B package would come in installments with $250B available immediately with $100B to follow as necessary. The balance would be doled out as needed and Congress can block it. Word is that executive pay for bailed out firms would be limited, the government would get a stake in the companies, and most other major issues are resolved.

Original: If you’ve been watching the news, you’ve probably heard of this massive $700B bailout bill that Henry Paulson, the White House, and Congress have been arguing over for the last week. Republican presidential hopeful John McCain suspended his campaign yesterday and threatened to cancel Friday’s debate unless a bailout bill agreement was reached. Both candidates will be heading to Washington today to get in the way and take photographs.

Last night, President Bush gave an address in which he proposed “that the federal government reduce the risk posed by the troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending.” and that “Our entire economy is in danger.”

My eyes have popped out of my head for the fourth time in two weeks at the numbers being thrown around… it’s like each bailout is trying to top the prior bailout. This time it’s seven hundred billion dollars.

What’s In The $700B Bailout Bill?

The Treasury wants the authority to buy up to $700 billion in “troubled assets.” In reality, the proposal wasn’t much more than that and took up a mere three pages. At first, that proposal included language that gave the Treasury complete authority with no oversight from anyone (for the first time in history, I’m happy Congress was designed to move “deliberately”). Fortunately that was scrapped and oversight was included in future versions. Here are other provisions the Democrat Congress wanted included:

  • Curb executive pay at companies that sell assets to the Treasury (something the White House agrees to),
  • Let the government have the option of taking an equity stake in companies that participate (news reports say this has been incorporated into the final bill),
  • Require the government to encourage foreclosure prevention for the troubled loans it purchases.
  • Allow bankruptcy judges to rewrite mortgages for consumers nearing foreclosure (this is a “nonstarter” for Republicans and unlikely to make it into the final bill).
  • Proceeds the government gets from the bailout to to a fund to pay for housing for poor families (Republicans don’t like it, they see it as a backdoor means of funneling money to liberal political groups, so it likely won’t make it either).

As of this morning, they’d gotten close to reaching an agreement. This page will update as more details emerge.

Why Do We Need This?

Why is this bill necessary? Our financial system depends heavily on financial institutions being able to lend money to one to one another. When you deposit $100 into a savings account, the bank can lend 90% of it away to borrowers (car loans, mortgages), to other banks, and to the government (Treasuries). If they lend it to another bank, that bank can in turn lend around 90% of it and if it lends it to another bank, that bank can lend 90% of that. So your $100 turns into far more when it flies around in the economy and that has fueled our tremendous growth.

What role does bad mortgage debt play and why do we need a $700B+ package to buy up this bad debt? The simple explanation is that financial institutions no longer trust one another. Let’s say I lend you money and you put your house up as collateral. If you default, we could always sell your house and I can get some of my money back. If we’re suddenly in an economic environment where your house could be worth far less than what your appraisal says… I’m going to slow down and maybe not lend you as much money (or none at all). That’s kind of what’s going on now. With all the bad debt rolled up in good debt, financial institutions don’t trust one another and that’s why it could cripple our economy.

Why is it better to shift the debt off a company’s shoulders and put them on MY shoulders? That’s an excellent question and I don’t have a good answer for you. We will have to see how the plan goes forward to really know but I believe the reasoning is that the bad debt can improve in the long run, much like how housing prices will go up in the long run, and the U.S. Government can wait that long. Ultimately, the belief is that this bill will infuse life in the same financial markets that have fueled prosperity in the last few decades and I think that helps everyone (but we’ll have to see!).

This is similar to the logic behind the AIG bailout. AIG had its credit rating reduced, forcing it to raise collateral in a short period of time. The government swooped in to keep AIG solvent and took an 80% piece. From what I’ve read, AIG’s subsidiaries were all profitable, it was just a short term liquidity issue. Is that the whole story? Who knows, that’s just what I, and everyone else, read in the newspapers.

As news breaks, I’ll keep this post updated.

 Personal Finance 

Welcome (Back) Marketplace Money Listeners!

Welcome, welcome, all of the great listeners of Marketplace Money!

For those of you who haven’t heard the podcast, Lynnae of, Steve of Brip Blap, and I had the pleasure of chatting once again with Tess Vigeland of Marketplace Money and it was a blast, yet again. The last time we chatted, it was about personal finance blogging, this time the topic was the financial chaos of these past few weeks and how things may be going forward. The entire show is available here and our discussion is here (clip recap).

If you only listen to our clip, you should consider listening to the whole radio show because there’s a piece where Stephen Hoffman interviews some children on the economic crisis. It’s absolutely adorable and priceless. They’re in Chicago and there’s one girl who says she’d resort to buying stuff in another country… like Detroit!

About Me & BFP

If, after my answers, you’re curious as to who I am, I discuss a little about myself and this site on the About page. I try to touch on all personal finance topics from banking to frugality, the stock market to saving for a home, and everything in between. If it deals with our money, how to save more of it, how to spend less of it (and still maintain a happy lifestyle), then chances are I’ll touch on it. If I don’t, tell me about it and I’ll try! And if you ever want to reach me, you can email me at the address in the upper right or use this handy contact form. Thanks!

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 Your Take 

Your Take: What The Heck Happened These Last Two Weeks!?!?!?!

Last week, the stock indices had both their single greatest losses and single greatest gains in the last six years. Despite all the insanity, the market as a whole lost little from Friday the 12th to Friday the 19th. We were short a few companies as Lehman collapsed and 80% of AIG went to the Feds but despite all that turmoil, the various market indices were OK. We also lost the last of the investment firms as Goldman Sachs and Morgan Stanley became bank holding companies. Oh, and did you hear? JP Morgan Chase is picking up a few pieces of WaMu yesterday.

A heck of a week huh?

What I’d like to know is what do you think about the last two weeks, what do you think about this $700B bailout bill (yeah, the one where one second there’s agreement and the next there isn’t?) and what have you been doing with your finances as a result of all this craziness?

Me? I haven’t touched a thing, fortunately I’m far enough away from retirement that I believe we can weather it. I don’t think we’re going into a Great Depression or anything like that (the central bank understands monetary policy and economics well enough to prevent that) but I wouldn’t be surprised if things were slow for a few years as a result.

As for that bailout bill? I only have eight classes of economics (that’s all I needed for that Econ double major, w00t w00t) and I am wholly unqualified to either justify or tear down the bailout bill. I understand the reasoning behind it but I don’t know if we’re going down the right path or whether we’re just signing yet another IOU. All I know is that the provision to snip the golden parachutes of executives at bail out firms better make it into the final draft. TGIF.

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