It’s late, and it’s limited, but for borrowers who feel their homes were wrongly or inappropriately foreclosed upon in 2009 and 2010, there is now recourse.

As part of a larger enforcement action (so-called “consent orders”) taken last April against fourteen of the nation’s largest mortgage banks/servicers following the so-called “robo-signing” scandal, the Office of the Comptroller of the Currency is beginning a “multi-faceted independent review of foreclosure actions.”

The major banks will have to fund these independent reviews to evaluate, “whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices.” If they did, those borrowers get some kind of “remediation.”

“The challenge is substantial, but the steps we have required the servicers to take are vitally important to resolving these issues in a way that respects the rights of those who have been harmed and helps to restore confidence in the system,” said John Walsh, Comptroller of the Currency in a statement.

The major mortgage servicers began sending out letters to eligible borrowers this week to explain the process. The requests for the reviews must be received by April 30, 2012. So how many do they expect will request these reviews, given that there are potentially four and a quarter million eligible borrowers according to the OCC?

“It could be hundreds of thousands,” Walsh told me in an interview this morning. “We are certainly hopeful they will have the capacity to handle it,” he added with regards to the servicers. Walsh also admitted that if the volumes are very high, it could have an impact on the current foreclosure process at major servicers, “to the extent that capacity that servicers have that they’d otherwise devote to other parts of the business are affected.” But he stressed that this is a backward looking, remedial piece and “shouldn’t” affect current foreclosure cases.

So could a borrower get his or her home back? It’s not out of the realm of possibility, although that is pretty unlikely given the home was probably already legally sold to someone else. Remediation would more likely involve fees that could be paid back or some other type of monetary compensation. No question it will be highly case-specific.

“The participating mortgage servicers remain committed to helping borrowers remain in their homes and have been working with federal banking regulators to resolve the issues raised in the consent orders,” explained Paul Leonard of the Financial Services Roundtable in a release. The reviews, he adds, could take several months to complete.

Challenge Your Foreclosure Now was provided by CNBC.com.

photo: TheTruthAbout…

One of the most frightening titles you can own right now is “homeowner.”  That’s because millions of us have completely lost the equity in our homes, which means we are in the unenviable position of owing more than the home is actually worth.  Nobody asks for their home’s value to fall, but plenty of homeowners are now in the position of trying to dispose of mortgages that are considered upside-down.

There are several ways to do this.  First, you can actually find someone willing to buy your house for enough dough to cover all of the mortgages it secures.  NOTE: That’s probably not going to happen so proceed to Option #2.  Option #2 is to pay the difference out of your own pocket.  So, if you owe $150,000 and find a buyer at $125,000 you’d have to show up at closing with a check for $25,000 to cover the difference.  If that’s not an option then you can walk away from the home (foreclosure), turn the keys back over to the lender (forfeiture of deed in lieu of foreclosure), or attempt to have the loan modified and stay in the property. Finally, you can attempt to short sell the home.

A short sale is when the lender accepts less than the full loan balance and considers the loan to be paid.  So, in the aforementioned example, if the lender had accepted $125,000 as a full payoff then you would have been on your way to a successful short sale.  The lender would eat the $25,000 deficiency and everyone would call it a day.  But it’s not that simple.  There’s the impact this event will likely have on your credit.

Short sales are a relatively new phenomenon and because of this there’s an incredible amount of misinformation about the impact to your credit.  Some people are even going so far as to say that a short sale is neutral to your credit, which is incorrect.  Short sales are reported to the credit reporting agencies as either settlements or charge offs, both of which are accurate.  The lender is settling for less than you really owe, and they’re likely charging off the deficiency.

Some people, real estate agents in particular, have seized this reporting format as to mean that short sales are not reported to the credit bureaus at all simply because the words “short” and “sale” do not show up on your credit reports.  And, they’re using it to market the value of short sales as a benign event in an effort to drum up business.  Pretty much every reputable credit source acknowledges that short sales are just as bad for your credit as any other negative mortgage event, but just in case it’s at all unclear, I offer the following statements from the people who actually invented the FICO credit score:

From the Minneapolis Star Tribune – “Both short sales and foreclosures are considered negative by the score, because our data shows us it’s very predictive of future credit risk,” Tom Quinn, vice president of FICO scores at FICO (FICO), formerly known as Fair Isaac Corp.” The claim that doing a short sale is not going to hurt your score is false. It’s inaccurate.”

From American Banker – “To the FICO score, there is very little difference between a short sale, a deed-in-lieu or a foreclosure — and we’ve been saying that to anybody who will listen, but this rumor that short sales are somehow benign has persisted,” Craig Watts, a spokesman for Fair Isaac, the maker of FICO scores.

That should just about clear up any misunderstanding or misrepresentation of how a short sale impacts your credit.  It’s still a better option than a foreclosure because people trying to market their home for a short sale will still maintain the home’s cleanliness, mow the law, and won’t rip out the copper piping or appliances.  But, it’s still not a clean break between you and your mortgage lender.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

Yomanimus

Making money in real-estate is all about timing. Despite the fact that many people lost not only their shirts but their homes in the mortgage meltdown, real-estate has historically been considered a safe investment. But if current trends continue, there may be more bust than boom. In fact, we may never see a mortgage market as booming as it was during during the early 2000′s. In addition to the flood of new homeowners, the housing boom saw an unprecedented number of speculators acquiring multiple properties, hoping to capitalize on ever-increasing housing prices. The combined effect of all this activity was a mortgage market of tremendous size – roughly $10 trillion in residential mortgages by late 2007, which equates to nearly a quarter of the total debt market in the US. But every boom eventually busts, and since ’07 the mortgage market has shrunk into a shell of its former self.

It should here be noted that the shrinking mortgage market is not only, or even primarily a US problem. BBC News reported in November 2008 that it was likely that, “…net new mortgage lending – gross new home loans minus repayments and redemption – would fall below zero in 2009 and see only a modest recovery in 2010.” These remarks were made following 2007 where net new mortgage lending stood at £108bn. Similarly, the UK’s Independent reported the findings of a study by Nationwide predicting that, “…the UK mortgage market will contract by 80% this year [2009],” and also that, “…house prices will fall for another 12 months.” Nationwide group development director Tony Prestedge estimated the total value of the mortgage market to be £18bn in 2008, compared with £90bn in 2007. Both estimates reach the same chilling conclusion of a drastically shrinking market.

The effects on the US market have, of course, been more prominent in the news. While the recent lowering of interest rates has spurred some activity, HousingWire.com recently reported that the number of mortgage applications filed in the week ending September 25 declined 2.8%, “…on a seasonally adjusted basis”, citing the Mortgage Bankers Association’s survey that measures total gross applications in the US. The refinancing index is also said to have decreased (albeit only by 0.8%) while the purchase index fell 6.2%. Another weekly survey, Mortgage Maxx, reached similar conclusions. After adjusting to “account for multiple submissions by the same borrower”, Mortgage Maxx found that total applications declined by 7.3% in the same week.

Casey Serin

Trouble began brewing before this year, however. According to BuilderOnline.com, 1 in 3 mortgage applicants was turned down in 2008 (a 32% denial rate) the same year that total mortgage applications were down by a third from 2007 and at less than half of 2006 levels. Even such mortgage activity as took place was largely of the government-backed variety. According to BuilderOnline, “…loans backed by the Federal Housing Administration soared to 21 percent of all loans made last year [2008] from less than 5 percent in both 2005 and 2006.”

The fallout from the housing bust has even affected tiny countries thought to be irrelevant to a crisis originating in the US. Bulgaria, for instance, saw the size of its mortgage market shrink twenty times in the first two months of 2009, according to Novinite.com. Only BNG 18 M was invested during January and February, as opposed to the BGN 355 M that was invested during the same months in 2008.

WoodleyWonderworks

All in all, the housing bust and the recession that followed have made for tough times in the mortgage market. Because mortgage-backed securities were packaged and sold to investors all over the world, what began as a US problem is very much an international problem with international repercussions. The silver lining (if there is any) may be found in the aforementioned recent lowering of loan interest rates to below 5%. As Reuters reported on October 7 2009, new mortgage applications are at a four month high. As a “tentative early indicator of sales”, these numbers may hold promise for the mortgages Nevertheless, substantial growth remains to be seen.

amycgx

Fresh off of the heels of Congress’s passing of the Credit Cardholders Bill of Rights, President Obama sent a proposed law to Congress, which if enacted, would create a shiny brand new Consumer Financial Protection Agency (CFPA). The agency would not only help enforce the Credit Cardholders Bill, it would expand into the broader scope of consumer protection. Treasury Secretary Geithner summarized the agency by saying, “This agency will have only one mission – to protect consumers”.

Knowing exactly what the proposed CFPA would mean for you is based largely on speculation at this point, and the full effects may not be seen for years (and the bill isn’t expected to go to vote until this fall or beyond). However, it’s fair to say that the primary reason behind the proposed creation of the new agency would be to police and put an end to the type of greedy and unfair predatory practices by financial institutions (mostly banks and credit providers) that has resulted in many borrowers suffering from undue financial hardship.

Citing the agency’s crackdown on predatory mortgage lending techniques, President Obama states, “You’ll be able to compare products and see what’s best for you. The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past.” Although, I find it hard to imagine that my next mortgage closure will result in anything less than a headache and a mild case of carpal tunnel, having an agency focused on enforcing simple, concise, and clear terms is certainly a step in the right direction.

According the White House’s official press release on financialstability.gov, the CFPA would

1. Provide protection against unfair credit card rate increases and late fee traps: The agency will enforce the credit card bill enacted by Congress and President Obama this spring, taking responsibility for enforcing the ban on unfair rate increases and for the implementation of new rules preventing late fee traps.

In other words, the Credit Cardholders Bill of Rights that was passed recently, but doesn’t go into effect until mid 2010 needs a governing body. The CFPA would be that governing body.

2. Set guidelines for simple “Plain Vanilla” products: The agency could create guidelines for standard mortgages without prepayment penalties; that are fully underwritten with documented income; that collect escrow for taxes and insurance; and have predictable payments.

Remember all of those funky ARM’s, jumbo loans, and other sleek mortgage names masking a product that is designed to rip you off? The CFPA would seek to put an end to these type of products.

3. Duties of care for mortgage brokers: The agency could require mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, and a duty to help ensure that only appropriate loans are offered.

A colleague who once worked for one of the nation’s largest mortgage lenders once told me that ‘in the good ole days’ mortgage underwriters would look for any possible reason to offer the largest loan possible and ignore little technicalities such as the borrower not providing proof of income. The goal of the CFPA would be to put an end to this type of practice and ensure that financial institutions are offering the right loan amounts to the right people in the right situations.

4. Ban unfair side payments: The agency could ban unfair practices such as “yield spread premiums” – side payments from lenders that encourage mortgage brokers to push consumers into higher priced loans.

Essentially, what the press release is trying to say here is that the CFPA would monitor and attempt to put an end to broker/institution side arrangements that are designed to steer you into a mortgage that may not be the best for you, but results in the mortgage broker getting a commission.

If you’d like to curl up and read the full version of the CFPA-Act bill, you can check it out here.

The Opposition

The financial industry will surely be up in arms over the bill, because it provides the type of oversight that they have been able to evade for so long. Opponents argue that the CFPA would limit product innovation and dictate what type of loans consumers should receive in certain situations.

Didn’t product innovation and offering ‘customized’ loans mostly get us into this mess?

For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.

For millions of homeowners, the past few months (or years) have been very confusing and frustrating as multiple government ‘fixes’ have turned out to be both inaccessible and, in many cases, downright imaginary. With estimates that one in five homes has a mortgage that is underwater, it is important to remember that there are plenty of options to pursue before you walk away from your home. From the FHA Hope Program to grand speeches by numerous politicians, we’re constantly being told that hope is on the way. But who do you talk to? When you call your lender, you get the run around, and you send documentation to get your loan modified, only to find that it sat on someone’s desk for three weeks. Will any of this change with Obama’s new plan that was announced yesterday? Here is who it helps, and what to do if you aren’t in the segment of the population that is eligible.

Who does this program help? First of all, you must be employed or receiving some type of income. If you are not receiving any income from any source, you will need to pursue a short sale or deed in lieu of foreclosure. This specific program helps people who have primary residence loans that are owned or backed by Fannie Mae and Freddie Mac up to $729,750 (although your loan servicing company could be anyone). Keep in mind that not all loans below this ceiling are Fannie or Freddie loans, and that this does not address another important issue – the piggyback, or 2nd mortgage. Of course, there is also a percentage of the population with loans higher than the threshold, but the authors of this package chose to help as many people as possible with the money allocated to staving off foreclosures, while the people who bought the multi-million dollar homes will need to pursue other courses of action.

If you do meet the initial criteria, your lender could potentially lower your rate as low as 2% in order to get you into the ideal range of 31% to 38% of your monthly income. Every scenario and rate will be unique as lenders weigh the cost of modifying the loan vs. foreclosing. The implementation of the program and the timing will vary among lenders and loan servicing companies, so you will have to be patient and will most likely start experiencing longer hold times, so just dial and put the phone on speaker and bake a cake while you are waiting.

The past year of course has seen an explosion of new loan modification and debt consolidation companies. The new industry shares some similarities with the mortgage business five years ago, when the lure of a fast buck drew plenty of good, honest people but even more people who took advantage of people to maximize commissions. You can almost imagine a scenario where the guy who made five percent commission on your loan and stuck you with a prepayment penalty on a loan that adjusted after one month is now on the other end of the phone offering to help you get your loan modified.

So, how do you find a reputable attorney and/or loan modification company to help you through the process. First, never go with the first person you talk to. There are companies that charge from $695 to $5,000 and higher to help you out, and it can be a daunting task to choose someone to help you out. You do not need to give each of the companies actual documentation, but you should be forthcoming about your exact scenario including loan amounts for both mortgages, approximate value of your home, and what your level of delinquency is. Once you have talked to three or four different companies, you should have a good feel for how they compare in terms of some of the following important criteria:

• What is the upfront fee?
• When is the next payment due, or is there a payment plan?
• What is the total fee?
• Is there an additional fee to have them handle a second mortgage concurrently?
• How long until you hear back from their initial review of your documentation?
• If the modification is not successful, how much of the fee is refundable and when?
• VERY IMPORTANT: How do they define a successful loan modification? Is the bare minimum that they guarantee enough of a savings to actually make the home affordable?

Once they complete an initial review of your documentation, they will move forward by sending your documentation to your lender. Some lenders are offering blanket proposals that are sent out en masse overnight to struggling homeowners, and they simply offer to recapitalize the past due interest, which adds the interest amount to your principal balance and actually increases your monthly payment. Basically, the lender is seeing if you will bite on that offer and start making payments again. There are definitely people out there who are doing good work for homeowners, and if you can’t get a personal referral, at least search for recommendations or warnings about the local person you are dealing with.

Moving forward, we can expect to see many new programs as Congress seeks to address the housing crisis from all angles. In particular, there is an important measure, the so-called ‘cramdown bill’ in the Senate (which was approved in a slightly different version by the House today) to give judges authority in certain bankruptcy hearings to order lenders to modify loan terms and balances on a primary residence rather than foreclosing. Additionally, we can expect to see packages that deal with the larger and more complex problem of second mortgages. Of course, it also remains to be seen how long these changes will take and on a macro scale, how much it will ultimately prevent foreclosures on a wide scale and bring relative stability to the housing market.

Source: Jeff Turner

One short day after signing the $787 billion economic stimulus plan on Tuesday, the Obama administration announced a $275 billion “Homeowner Affordability and Stability Plan (HASP)”. The executive summary, presented by Obama in Phoenix, AZ, highlights the three major problems that homeowners face today:

1. Inability to Re-Finance

Responsible homeowners have seen their property values fall and due to a weak credit market they are unable to re-finance at a lower interest rate. In Obama’s remarks, he stated that since 2006, home values have dropped an average of 25% nation-wide. This means that you could have done everything ‘right’, yet still be 25% or more in the hole in home equity.

2. Unemployment Leading to Increased Foreclosure Risk

Millions have lost their jobs and as many as 6 million more families are at risk of foreclosure, according to the Obama administration. To be exact, 2.6 million people lost their jobs in 2008, and an additional 598,000 lost their jobs in January of this year. Many of those who have not been able to claim a new job are now struggling to meeting their mortgage payments.

3. The Snowball Effect of Foreclosures

Foreclosures are hurting neighborhoods through a decline in property values. The administration estimates that with each foreclosed home, nearby properties drop as much as 9% in value. This contributes further to those doing everything right being deeper in the hole in terms of equity.

To address these 3 issues, Obama’s executive summary highlights a 3-part solution:

1. Affordability

Provide low-cost re-financing to 4 to 5 million responsible homeowners who have loans that are currently guaranteed by Freddie Mac or Fannie Mae. Allowing these homeowners to refinance would lower their monthly payments. The following example was given in the summary:

“Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.”

2. Stability

This would involve creating a $75 billion “Homeowner Stability Initiative” to help 3 to 4 million struggling homeowners who commit to make reasonable monthly mortgage payments. Details include:
- Incentives to reduce the borrower’s monthly mortgage payment to 38% of his or her income
- Providing $1,000 payments to borrowers that stay current on their loan, up to five years
- Providing “pay for success” incentives to mortgage providers for conforming loan modifications
- Creation of an insurance fund up to $10 billion to discourage lenders from foreclosing on borrowers
- Allowing judicial modifications for borrowers that are out of options
- Providing $1.5 Billion in relocation and other assistance to those displaced by foreclosure and $2 Billion in Neighborhood Stabilization Funds

3. Confidence in the Mortgage Market

This would come through supporting low mortgage by doubling the preferred stock back-stop funding for Fannie Mae and Freddie Mac to $200 billion each (from $100 billion), and continuing the purchase of mortgage-backed securities issued by them to promote market liquidity.

For further details, the White House Blog has released an extensive Q and A on the HASP.

How does HASP Effect you?

If you’re a homeowner, what does this plan do for you?

Are you confident that it will help you?

What else needs to be done in order to secure your confidence in the housing market?

For more of GE Miller’s writing, visit 20somethingfinance.com

Detroit

Detroit’s economy has been hit hard in the last six months, with the Big Three automotive producing companies on the brink of bankruptcy and failure, and in need of government assistance. Due to the manufacturing industry, many experts estimate that the unemployment rate of the Detroit metropolitan area is at a generation-high 21%. Not surprising when 14% of automotive industry workers have been laid off in the last year. As a result of this highly localized recession, there are over twelve thousand abandoned homes in the Detroit area.

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Riverside County, California

The last two decades have seen a surge of growth for the Inland Empire (better known as Riverside County), which had a population of 2.6 million in 1990; in 2007, the population was estimated to be 4.1 million. This massive eastern exodus from the more urban Los Angeles and the high prices of Orange County had a number of implications for the region. First of all, the move eastward drove up the demand and development of housing in the area, which steadily increased throughout the past decade. Secondly, these houses were purchased by many people who wanted to buy bigger homes for the buck than they could get in LA and the OC, which of course led to an increase in speculative building and investing. It is estimated that in 2005, only 15% of area homeowners could actually afford their houses, with the remaining 85% living beyond their means or in adjustable rate mortgages that had not yet adjusted. The latter, once adjusted, would then prove to be unaffordable.

It is also important to note that this area was a known hub for building up Southern California’s rapid suburban sprawl – not only was this one of the state’s regions with the most expansion, but it was also an area that furnished many of the construction companies with cheap labor that made surrounding communities’ growth possible. By August of 2008 alone, the foreclosure rate for the county was over 4,700 houses, up over 174% from August 2007. By the end of 2008, the median price of a home in Riverside county dropped to $220k, the first time it had dipped under $300k since the 1990s. In some Riverside County neighborhoods, as many as 20% of all homes are have been foreclosed and now sit vacant.

source

Stockton, California

Currently, 90% of all sales in the greater Stockton region are either foreclosures or short sales. The median house price dropped to $237K by December 08, the lowest it has been since February 2003. It is estimated that housing prices in former boom markets are more than 40% off what they had been leading up to 2007.

source

Las Vegas

Las Vegas and its surrounding suburbs are home to the nation’s third highest foreclosure rate for a metropolitan area, with 1 in 44 at some stage of foreclosure. By end the end of 2008, median housing prices deflated by $20,000 to the lowest since 2005. Housing inventory would also skyrocket to 30,000 in Q3 2008, with the pace of housing sales having declined 34% from the year prior. This volume is equal to 14-16 months of inventory of homes for sale, well above the national average of six to seven months.

Just over a year ago, the Greater Las Vegas Board of Realtors calculated that 45% of the 22,000 single-family houses for sale at the time were actually vacant. Most all of these were houses abandoned by new area residents, or investment properties by the area’s thousands of speculators who were drawn to the region because of its recent track record of housing price increases. Squatters are increasingly seen occupying the abandoned properties.

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North Los Angeles County, California

With the vision of urban sprawl connecting Los Angeles to Bakersfield and the plans for a train connecting the two, builders began winding through the hills to the north from LA. Today, in Antelope Valley, for example, it is not unusual for long-term rental property owners to have to deal with tenants who recently lost their own home to foreclosure and are having difficulty getting back on their feet. In some cases, tenants do everything from the typical stripping of copper wire to be sold to the more bizarre use of cabinets for firewood. Abandoned investment properties are on the rise.

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Miami, Florida

Miami-Dade and neighboring Broward counties have experienced an extremely high rate of foreclosures over the past two years. It is estimated that 143,000 homes were voluntarily given back to the bank, or foreclosed upon. In Miami-Dade County alone, there are currently 38,000 new condos that are recently completed, or near-completed that are vacant and show no prospects of immediate sale. The MLS for the country shows over 25,000 condos for sale in the county, which equate to a 4.5 year inventory. This of course, does not include unfinished units.

Many experts suggest that the housing market in Miami will witness a further devaluation in 2009 of over 20% of the median housing price. The biggest reason for this is arguably the over-development of medium and high-end condo constructions in the area, many of which are second or vacation homes. It is an extreme case of the common sense knowledge that second homes and investment properties are the most likely to be abandoned in favor of the owners’ primary residence when times get tight.

source

Phoenix, Arizona

Arizona ranks 48th in New Job Creation. Developers spread to the west to Phoenix and as far out as Buckeye and foreclosures are currently at a record high, which has resulted in plummeting housing prices. This is a hard pill to swallow for many recent first-time buyers, who are witnessing a sharp increase in their monthly mortgage payments, against the background of a house with a drastically decreasing value.

Of the 6,150 houses sold in the Phoenix metropolitan area in September 2008, an astounding 78% of these were vacant when sold. There are currently 55,000 homes for sale in Phoenix, of which 40% have been abandoned and are presently vacant. Most of these are currently bank-owned properties and are being sold at liquidated prices. According to area investor and resident, Donna Butera, this massive departure and house abandonment in Phoenix has had other implications in the community. Understandably, home owners are deciding to walk from their mortgages if the home they just agreed to buy for $350,000 is now only worth $270,000. As a result of the frustration, homeowners are removing everything they can from the homes before they abandon them, selling appliances, cupboards and virtually everything else, including the kitchen sink. As a result, it is not unusual to drive down a street in what was once a nicer suburban neighborhood in Phoenix and now see a majority of windowless abandoned homes.

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With so much focus on the demise of banks of all sizes, its easy to imagine the worst doomsday scenarios and wonder if your own bank is next. However, some banks have continued operations throughout civil wars, world wars and economic depressions without going under. These are not the first banks in the world, which trace back to early lending from priests to merchants in 18th century B.C. Babylon and up through the Roman empire, but rather these are five of the oldest surviving banks in the world, and they each tell a story.

Bank of New York (now Bank of New York Mellon)

New York, New York (Founded 1784)

(Source)

It began with a press release in the New York Packet, announcing the plan to form New York’s first bank in 1784. Alexander Hamilton, a respected attorney at the time, drafted the bank’s constitution and led The Bank of New York through its formation and early years. Eight years later, it was the first company to be traded publicly when the New York Stock Exchange opened in 1792. There is also an abundance of history behind Mellon Financial Corporation dating back to the Industrial Revolution, who merged with Bank of New York in 2007 to become Bank of New York Mellon. Today, it is the oldest bank in the United States, and they get to have One Wall Street as their address to prove it.

The Bank of Scotland (now Halifax Bank of Scotland)

Edinburgh, Scotland (Founded 1695)

(Photo Courtesy of HBOS plc Group Archives)

Although the concept of currency and bank notes wasn’t necessarily new to Scotland in the 17th century, the Bank of Scotland was the first to print its own paper currency. Further, it was unique in the sense that it was set up to help businesses, whereas the Bank of England, established one year earlier, existed primarily to finance government defense spending. Early on, it faced fierce rivalry from the Royal Bank of Scotland, and in one instance, RBS (the “new” bank) began hoarding the bank notes issued by Bank of Scotland (Old Bank) in order to present them at once, forcing old Bank of Scotland to call their loans and cease payments for six months. This didn’t sink them though, and this old resilient bank has remained as the only existing commercial institution created by the Parliament of Scotland. The Bank of Scotland merged with Halifax Bank to become HBOS in 2001.

C. Hoare & Co.

London, England (Founded 1672)

(Source)

Before modern street numbering, people used signs to locate a shop, and Sir Richard Hoare couldn’t have chosen a much better symbol than the Sign of the Golden Bottle, as gilded bottles were a sign of luxury and wealth commonly used by the goldsmiths who shaped the precursors to more modern banking systems and paper currency. This private banking institution has proven to be remarkably resilient. Of note is the fact that their building was evacuated during World War II and saved from a fire by a few brave employees. Furthermore, the bank is still completely family-owned and managed by direct descendants of Sir Richard Hoare.

Berenberg Bank

Hamburg, Germany (Founded 1590)

(Source)

Formed in 1590 by Hans and Paul Berenberg, two brothers who ran a cloth trading and import/export business, the company was very lucky to be growing during a time of prosperity in Hamburg, Germany. The city quickly grew as a hub of financial and trading activity, and they were able to thrive along with other members of a small, tight-knit group of Dutch people that didn’t even have full citizenship rights in Hamburg. Berenberg Bank today has offices throughout Europe, and remains Germany’s oldest private bank today.

The Oldest Bank in the World: Banca Monte dei Paschi di Siena

Siena, Italy (Founded 1472)

(Source)

Originally formed as The Monte di Pietà, or Monte Pio, to make loans to the poor out of charity, this is the longest running bank in the world. “Monte,” meaning “heap” or “pile,” referred to the collection of money used for charitable distribution, and the bank truly served to benefit the city’s economy. One interesting historical note is that the citizens of Siena put up income from the land as guarantees against loans for farming and city infrastructure, which led to it being referred to as Monte dei Paschi in reference to the land. Today it stands out as the oldest existing bank in the world by far, and remains an esteemed bank that has branches throughout Italy.

]]> http://www.mint.com/blog/trends/the-five-oldest-banks-in-the-world/feed/ 43 http://www.mint.com/blog/investing/what-to-do-when-the-market-plunges/ http://www.mint.com/blog/investing/what-to-do-when-the-market-plunges/#comments Tue, 07 Oct 2008 18:44:12 +0000 James David Spellman http://blog.mint.com/blog/?p=440 ]]>

With the Dow Jones Industrial Average dropping more than 800 points Monday as the credit meltdown pushes the world’s economy into a recession, how should prudent investors respond?

More likely than not, the value of the stocks and bonds held in your company’s retirement savings account or your IRA are down.

If you’ve invested in a stock index fund based on the Standard & Poor’s 500, you’ve suffered a loss of roughly 35 percent since last October, the date economists agree the bear market began.

Depending on how long you’ve held your stocks, the average cost of shares in your account may be less than what you paid for them over time (the average cost basis).

That’s enough to make you want to cut your losses now and hold only cash or to cut back on what you’ve been setting aside as tax-deferred for retirement. But before you rush into these potentially disastrous decisions, consider the following:

Risk flattens over time. The worst one-year return for small company stocks over the past eight decades was nearly 60 percent. As you move out 20 years, the worst-case scenario for those stocks is a positive six percent, according to Ibbotson Associates, Inc.

True, although it has taken the S&P 500 on average 13 months to recoup losses completely, you may have to wait as many as three years for stocks to rebound and enter bull territory if past history is any guide.

Even still, over time, those who are willing to commit to a diversified, consistent long-term investment program will see their capital grow.

Why? As in life, so too, with investing. How many times have you been right—even with the most rigorous analysis to support your decision?

Timing the market is impossible. Though many hardcore investors think they can do this, the facts say otherwise. Studies show that investors who bail out of the market and then re-invest when the market recovers to pre-bear market levels do worse than those who remained fully invested.

Given that shares have likely priced in all available information about their worth, it’s unlikely that you have an edge in stock picking. That’s the point Princeton University Professor Burton G. Malkiel makes in his book, A Random Walk Down Wall Street.

Malkiel builds a strong case for index investing. Transactions costs are low, which can cut deeply into returns. All my investments are in index funds because Malkiel’s argument convinced me. The one time I saw an outsized gain with a stock pick was wiped out by a loss from what appeared to be a sure win until a lawsuit hit.

Through dollar cost averaging, too, your costs are spread out over time, benefiting from market dips. You buy more shares when the price is low and fewer shares when the price is high.

Diversification is a hedge against market irregularities. Given the turbulence in the markets, now is a good time to look at your portfolio’s diversity. A general yardstick to determine the percentage of stocks and bonds you want to hold is based on age.

If you’re 25, you may want to hold 75 percent in equities, with a good portion in the more risky small size companies that tend to experience the greatest gains and losses compared to blue chip stocks. Investing a percentage, too, in an international stock fund, will help you to profit from a global economy that is shifting away from the US.

Investment advisers differ about this formula though, with some arguing recently that you may want to hold a disproportionately higher level in fixed-income given the equity markets’ volatility, which one is today above historic peaks (CBOE volatility index).

The mix of stocks and bonds that you’ll choose will depend on your tolerance for risk.

So, looking ahead, here’s a checklist:

• Review your holdings now to determine if you are adequately diversified and if your holdings are appropriate given your tolerance for risk and your financial goals.
• Don’t give up saving, particularly if your employer matches your contribution to a retirement plan. Your nest egg will likely be your largest source of retirement income.
• Resist the temptation to cash out. Stocks over the long term, and I emphasize long, outperform other investments. But you may have several years of a bear market before you see any bounce in your portfolio’s performance.
• Seek out advice. Understanding how markets perform over time is important to help you make decisions.

James David Spellman is principal of Strategic Communications LLC based in Washington, D.C. and an adjunct professor at George Washington University.

After the recent market meltdown and subsequent federal bailouts, public confidence in the US economy is on the wane. Sure, if you’ve got less than $100,000 in a deposit account, you are covered by federal insurance. But the obvious next question is, “what if the FDIC goes broke?”.

On September 25th, John McCorry, the executive editor of Bloomberg published a piece in which he questioned the stability of the FDIC and pondered how much is needed to cover their losses. After all, the reserve fund of the FDIC stands currently at $45 billion, which sounds paltry in comparison to the amount of money being pumped into banks to keep them afloat, let alone the amount it would actually take to cover the deposits of customers in the bank failures that could still potentially come our way. He wrote that “emergency federal lending to the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion—not including the $700 billion general Wall Street bailout now under discussion in Congress.” The FDIC is required to pay back any such federal lending, and such debt is repaid through premiums that banks pay to have their customers’ deposits insured. Banks are willing to pay these premiums because it helps uphold the key ingredient of the banking system–trust.

In direct response to this article, Andrew Gray, Director of Public Affairs for the FDIC, reassured the public that “Congress, understanding the need to ensure that working capital is available to the FDIC to provide bridge funding between the time a bank fails and when its assets are sold, provided broad authority for us to borrow from Treasury’s Federal Financing Bank.”

In addition, because the banking system is so dependent on the faith of the public, which is partially reinforced by the federal backing, the FDIC itself will receive income in perpetuity because any surviving banks will pay any premiums necessary to have that seal of trust on their front door. He went on to state that, in the only instance when the FDIC actually had to borrow money from the Treasury in the early 1990s, the money was paid in full with interest in two years. In a further move to reassure the public, he reminded us that “no depositor has ever lost a penny of insured deposits, and never will.”

Historically, the FDIC has a good track record of repaying its debts to the Treasury, beginning with its $289 Million initial funding when it was established in 1933, which was repaid in full by 1948.
In some cases, such as JP Morgan Chase Co.’s acquisition of WaMu, the fund is not dented by a bank failure. In others, such as the takeover of Wachovia by Citigroup, the exposure is potentially far greater as the FDIC is covering all losses above $42 billion. Earlier, with the failure in July of IndyMac, the fund fell below its 1.15% reserve requirement (the total fund divided by the $4.29 Trillion in deposits that are insured), so the FDIC is holding mandatory meetings this month to develop a restoration plan for the fund.

Stay tuned as the revised Bailout Bill that passed the Senate on Wednesday and goes to the House on Friday will also have a large impact of its own, as it will increase the consumer protection on FDIC insured accounts to $250,000 if it passes. This increase will match the amount of insurance coverage in place since the Federal Deposit Insurance Act of 2005 passed, which protects an Individual Retirement Account at a member bank up to $250,000. As this increases the potential liabilities of the FDIC, they will certainly need to tap their Treasury lines of credit at some point, but it is reassuring that they have the full backing of the government as it is obviously in everyone’s best interests to make sure that the money of the people is protected and guaranteed. If the bill passes the House vote, it will give the FDIC unlimited borrowing authority to cover bank losses. Though heavily criticized by some, most believe it is necessary to shore up the confidence and trust to prevent the bank runs that crippled the country further in the early 1930s.

Keep in mind that credit unions are covered through the National Credit Union Share Insurance Fund, and if your deposits are with a credit union you can find most of the answers to your questions and concerns here. For more information on what is covered by the FDIC, see our previous post “Bank Fail! Is Your Money Safe?”.