“Well I’ve taken a lesson from the banks and started hording my cash. I had paid off $10k on my HELOC over the two years I’ve had my condo but last week I took it back. Now the only thing I have at risk in my place is the 5% down…”
JPMorgan Chase’s Jumbo Mortgage Performance And Default Forecast [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by sunnyvalesteve

    So what are you doing with the cash? 2 percent CD or stashing it in the mattress? Not many safe haven investments these days…

  2. Posted by Willow

    Good strategy! Yes I’m holding on to my cash too in the (all too likely) event that most, if not all, of the equity on my home is wiped out. Added to that the employment market continues to rapidly deteriorate.
    There are lots of properties on the market at the moment that I would have jumped on 2 years ago but buying right now (for me anyway) is far too risky.
    I was also thinking about a unit at the Infinity but can’t really justify pricing in my own mind based on the macro economic environment.

  3. Posted by unearthly

    Most banks are just crap; 1.25% is the best rate at Wells for > $50k. HSBC was giving 3.5% last September for > $50k, now it’s down to around 2.5%. You can pay Fidelity to hold on to your money (FDLXX). No one wants to pay good rates (including the USG) because there’s an unwillingness to accept that money is no longer cheap.

  4. Posted by anonn

    sunnyvalesteve,
    You actually grabbed money BACK from a HELOC in this environment, and from behind a 5% down? What sort of condo do you have? It doesn’t appear that one lender thinks you’ve lost any equity whatsoever.

  5. Posted by anonn

    whoops. Sunnyvalesteve didn’t say that. Someone else did. And color me skeptical about this one for numerous reasons.

  6. Posted by anon

    Sounds like a smart move to me! Borrow money at 3.5% and stash it away and get 1.5% for it!
    And who said debt wasn’t wealth?
    If you had decided to just slow down the repayment of an existing HELOC, I think that would make sense (that’s what I’m doing myself–making the minimum payment, stashing the rest), but to borrow your own money back from the bank doesn’t sound too smart to me.

  7. Posted by David

    It’s not wealth, it’s an unemployment insurance policy.
    Let’s say I draw down $50,000 at 5% HELOC rates. I stash it in a CD ladder paying out an average of 2-3%. My net cost is $1,000/year to insure that if I lose my job, I have 6 months of living expenses, including paying the minimum on the HELOC (or HEL or whatever loan vehicle).
    It’s worth it if you don’t have the net cash in savings. Especially with lines getting cut off right and left (thanks Citi, I’m glad my tax dollars are going to you. I have a 787 FICO score, and they still cut my limit and raised my interest rate on my credit card, which I am canceling…)

  8. Posted by EBGuy

    It’s not wealth, it’s an unemployment insurance policy.
    …And how about an inflationary hedge on the flip side? I noticed Chase is at 4.625% for a conforming refi (30 yr fixed, 1.375 pts).

  9. Posted by anon

    In a depreciating economy, even zero nominal interest rate can have positive real interest rate. The dollar in my wallet is earning interest as we speak!

  10. Posted by EBGuy

    Whoops, just to clarify, it looks like the 4.625% rate is based on an LTV of 60%.

  11. Posted by rick

    Inflationary hedge? Only if property values are going up. A leveraged depreciating asset is a recipe for disaster, not hedge.

  12. Posted by anon

    It’s not wealth, it’s an unemployment insurance policy.
    Yes, I get that. And it does make sense to draw upon a HELOC while you can if you think you’ll need the money, are in danger of being laid off, and think they’ll cut off your credit line.
    My point was that I wouldn’t be patting myself on the back if I had no savings and recently bought a condo for 5% down.

  13. Posted by anonn

    I don’t find this scenario particularly plausible to begin with. Nor would anybody else with a second right now, I’d think.

  14. Posted by sanfrantim

    Borrowing more money from my HELOC does not make sense for me right now. (Though, I love the creative notion of considering it unemployment insurance, for those who don’t have enough cash stashed away.)
    I am using my extra cash these days to pay down my mortgage debt and re-fi into a conforming loan. I stand to save $1500 a month — that’s way more than what my cash (earning 1.2%) is doing for me right now.

  15. Posted by Rillion

    “And color me skeptical about this one for numerous reasons.”
    You can be as skeptical as you want. I’m not making it up. My 1st & 2nd (the HELOC) were both originally issued by American Home Mortgage. When they folded Wells Fargo ended up with the 1st (not sure if they own it or just service it, didn’t pay that much attention). The HELOC ended up with EMC (which was owned by Bear Sterns), when BS got folded into however, my HELOC was frozen. Based on the letter I received at that time it implied that they were doing this by zip code.
    Then in the summer of last year when an old bankruptcy dropped off my credit report my FICO jumped to 840. About a week later I got a letter notifying me my HELOC line was unfrozen. My thought is that EMC/BS has a zip code & FICO filter.
    Now that the rate on the HELOC has dropped to 3.5% (prime + .25) the additional payment to have the $9,750 I paid down back in my pocket works out to less than $20 a month after adjusting for taxes.
    Still have figured out exactly what I’m going to do with the money yet. I’d be willing to put some of it at risk to try to make some money but my partner is more conservative and doesn’t want to put it in anything except a CD or money market fund.

  16. Posted by EBGuy

    A leveraged depreciating asset is a recipe for disaster, not hedge.
    Not if you have an implied put.

  17. Posted by Rillion

    “It’s not wealth, it’s an unemployment insurance policy.”
    Pretty much. I do work in the financial industry and changed jobs last summer, so I’ve got less seniority then a lot of my co-workers and if layoffs happen I might be one of the first ones out the door with little in the way of severance. Since EMC has already frozen the line once I figure I might as well get it out now before they change their mind and freeze it again.
    It also isn’t my only savings. I’ve got 3 months of cash in savings plus another $50k in 401k/Roth IRA/HSA accounts. And no other debt then housing related debt (no credit card debt, no car loans, etc.).

  18. Posted by anonn

    Now that you’ve fleshed it out I believe you. Thanks. That’s an interesting bit of credit thawing in action.

  19. Posted by gowiththeflow

    “Now that the rate on the HELOC has dropped to 3.5% (prime + .25) the additional payment to have the $9,750 I paid down back in my pocket works out to less than $20 a month after adjusting for taxes.”
    All the HELOC I shopped and the one I signed on for have a floor of 4.25% – where can you find one with out a floor to get the 3.5% other than EMC? Any ideas?
    Also to speak to what Rillion is up to – I know tons of people (although I would never take the risk) that have pulled all money available on credit cards, Helocs, etc. for the same reasons. These folks are moving the money around based on int rates, for example using a low int card to pull money and putting it some place where they make money, than pulling more out and hoarding the cash.. all in an effort to have cash on hand.. scary times. I have a feeling in addition to the Alt A problem we face, that the credit fiasco all ready exploding is about to get even bigger as people lose jobs and need to find money to live on.

  20. Posted by anon

    All the HELOC I shopped and the one I signed on for have a floor of 4.25% – where can you find one with out a floor to get the 3.5% other than EMC? Any ideas?
    I have one at BofA that is currently at 3.24%.

  21. Posted by Rillion

    “All the HELOC I shopped and the one I signed on for have a floor of 4.25% – where can you find one with out a floor to get the 3.5% other than EMC? Any ideas?”
    EMC didn’t issue this (they bought it when AHM went under) so I don’t know if they offer anything similar now. I think a lot of institutions have padded their margins on new lines as Prime has dropped.
    ***
    GWTF – I know what you mean about not taking the risk. That’s why I haven’t decided what I’m going to do with the cash yet. In order to actually ‘profit’ on the transaction I would either have to lock it up in a CD for longer then I would want or I have to take some risks which I don’t know if I want to do right now.

  22. Posted by gowiththeflow

    Thanks for the rate info.
    Rillion you obviously have to review your own circumstances, determine what is best for you.
    I personally thought the pulling money thing was crazy because I prefer to remain debt free. However the people I know doing what I mentioned were advised by accountants to keep the cash on hand.. I was very surprised to hear it.

  23. Posted by diemos

    “However the people I know doing what I mentioned were advised by accountants to keep the cash on hand.”
    Walk away from your mortgage with nothing in hand
    … or …
    walk away from your mortgage with a pile of cash.
    Foreclosed is foreclosed, regardless of the amount. In for a penny, in for a pound. The banks were fools not to cut the credit line on that HELOC.

  24. Posted by condoshopper

    if you walk away from your home, from what i understand the primary mortgage holder ends up holding the bag, but if you took out a HELOC in order to hoard the cash, is the HELOC forgiven also?

  25. Posted by SF Loser

    Looks like you are already planning to file your next bankruptcy. It’s amazing these banks never learn.

  26. Posted by diemos

    “It’s amazing these banks never learn.”
    It’s the taxpayers who will wind up funding Rillion’s rainy day cash stash. Nice of them.

  27. Posted by LMRiM

    Rillion’s strategy is sensible IMO. It’s cheap insurance against the very real risk that the property declines 30% from here.
    Although there might be some negative carry now associated with this strategy (because safe after tax returns on the HELOC’ed funds will be lower than the after tax costs of the HELOC in the near to medium term, at least), in the event that Rillion wants to walk away because property values have fallen and/or a personal financial situation makes owning the asset less desirable, not much value will be imploded. Only 5% of the purchase price in the example he gave.
    Because foreclosure or short sale takes a while, he could look forward to an absolute minimum of 3-6 months of free rent, and if combined smartly with a personal bankruptcy, perhaps more than a year of free living. That will quickly return the value of the 5% remaining at risk. There is always the lottery ticket, as well, that the government will lower his loan value so that he could service it with 31% of income, and a layoff or other loss in income might even be desirable in that case (hopefully, it would just be a temporary one that only lasts long enough to get the loan value lowered).
    I advised a family member to cash out the value of his inflated house in 2005 after it had run up more than 100% since purchase in 2001 (New York State). 80% of appraised value. The house is now well underwater (to the loan). He thanks me all the time for that advice, which he was smart to follow (he’s also earned well in excess of the after tax cost of the funds over the past 4 years or so).
    It’s always a question of what to do with the HELOC’ed or refinanced dollars. 529 plans are very interesting vehicles in this regard, and for anyone who has reasonable assets and wants to shelter some from a possible bankruptcy, a discussion with a good lawyer or planner is well worth it. A reasonable amount of money can be put into 529s (up to $130K per child in one year for a couple when it is their own child, and $26K per recipient for others), and a wrinkle in the 2005 bankruptcy law makes these accounts bankruptcy remote even though the grantor retains full control over the disposition of the assets – even the ability to change beneficiaries!! (so long as the contributions were made prior to 2 years before BK – this stuff takes planning, and that’s what planners and lawyers are for!). As any tax or estate planning lawyer will tell you, the ability to get assets out of one’s estate (for tax or planning purposes) and yet still retain control over the asset is the Holy Grail.
    When planning, you always run into the red herring of “is that moral?”, or “I don’t act like that”, etc. Well, fine. Don’t impose your morality on me I always say! Anyway, with what the government is doing, and the abject corruption and cynicism of the policymakers, any attempt to graft systems of personal morality onto this cesspool that has been created is seriously misguided IMO. But, to each his own :)
    As diemos correctly notes, the taxpayer will wind up paying for this sort of rainy day fund, but that doesn’t bother me. The taxpayer has acted like an utter fool for decades, and is going to get exactly what he deserves.

  28. Posted by diemos

    “Don’t impose your morality on me I always say!”
    Morality is always imposed. You don’t need any morality to prevent people from doing things that harm themselves. You only need morality to prevent people from doing things that benefit themselves by harming others. Whether through childhood indoctrination or adult social or legal sanctions morality is always imposed. Morality is always imposed because without it society collapses.

  29. Posted by Anon

    Presented with the following request for advice:
    “I just borrowed a bunch of money I have no intention of paying back and I want to make sure my creditors can’t reach it”
    a good lawyer will politely decline to represent you and wish you a good day.

  30. Posted by LMRiM

    It’s all how you phrase it.
    Approach an estate planning lawyer saying, “I’m interested in 100% legal structures to protect the wealth I have accumulated (for my kids, of course) in the event that something unthinkable were to happen – say bankrupcty”, and you won’t have any problems with the legal profession or finding representation.

  31. Posted by Anon

    That’s not how you phrased it above.
    If you’re a lawyer I truly hope you are not a representative sample of the the California Bar.

  32. Posted by diemos

    You know, LMRiM. If you want to experience what it’s like to have pure free market capitalism unfettered by any government or regulation and where everyone thinks like you do you can experience that today.
    It’s called somalia.
    Enjoy.

  33. Posted by LMRiM

    I’m surprised, diemos, at a straw man argument from you. No one ever said no “government” or no “regulation”. And of course, with no real recognition of private property rights (or the means to preserve them impartially), Somalia is more like a mobocracy or “might makes right” society – certainly not free market capitalism!
    All systems are imperfect I guess, but I think a a system in which a vigilant citizenry is committed to the idea of a limited government whose primary purpose is the impartial application of law – a fair referee – is more likely to succeed than others in the areas people should care most about. We’ll never know, of course, but I’d rather strive towards that than other models. Regardless, what we have now is outright theft by the political classes, and an almost powerless (and largely clueless) population. That seems to me to run a greater risk of a Somalia or more likely USSR outcome (ultimately) than a limited state.
    It doesn’t matter anyway – just academic. It’s all completely out of our hands, and barring a revolution (which is not going to happen), the state apparatus we have allowed to grow into omnipotence is going to do whatever it wants.

  34. Posted by diemos

    “but I think a a system in which a vigilant citizenry is committed to the idea of a limited government whose primary purpose is the impartial application of law – a fair referee – is more likely to succeed than others in the areas people should care most about.”
    yes, I agree.
    “It’s all completely out of our hands”
    No, it’s not. We are society. It starts with us. What you advocate is that we should just throw up our hands and join in the pillaging instead of stopping it.

  35. Posted by Rillion

    condoshopper: “if you walk away from your home, from what I understand the primary mortgage holder ends up holding the bag, but if you took out a HELOC in order to hoard the cash, is the HELOC forgiven also?”
    My limited understanding is that it depends if the HELOC was used to buy the property or if you used it to take out ‘appreciation’. I believe that “purchase money” is nonrecourse while anything in excess of purchase money could potentially be recoverable.
    Personally I’m not planning on walking way from my place or going through another bankruptcy ever again so I haven’t researched the matter that extensively.
    LMRIM: “There is always the lottery ticket, as well, that the government will lower his loan value so that he could service it with 31% of income,”
    Of course I wouldn’t mind some free government cheese if it came my way I doubt I will qualify for any of it. Our current gross costs of ownership (HOA, 1st & 2nd, RE taxes) are 31.4% of our gross income. And I’m most certainly not going to hope I or my husband become unemployed. The extra $10k in the bank helps me sleep a little better at night knowing I’ve got a little bit extra cushion in case things get as bad as my overactive imagination fears.

  36. Posted by LMRiM

    What you advocate is that we should just throw up our hands and join in the pillaging instead of stopping it.
    As soon as you come up with a plan for stopping it, I’m right there with you, diemos! I actually think the only way it will stop at this point is if everyone games the system so much that it collapses. We’ll see. The Bastiat fiction (everyone can live off everyone else through means of the political process) is not going to go down easy, that’s for sure.

  37. Posted by diemos

    “I actually think the only way it will stop at this point is if everyone games the system so much that it collapses.”
    Waaaaahhhh!!!
    But I don’t *want* to live through a societal collapse. There’s no hot showers and the convenience stores run out of cheese doodles. Come on, work with me LMRiM. I’m sure with some duct tape and ingenuity we can hold it together for a while longer.

  38. Posted by LMRiM

    Too late, diemos, we’re too far gone. We have a tax cheat running the Treasury. The best thing anyone could possibly say about all the elected and appointed officials running the show is that they are better than the last gang, and I’m not sure vene that damning by faint praise is accurate.
    The system will hold together, though, if the metric is hot showers and cheese doodles. It should be a fairly orderly decline, I bet. 30 years from now we’ll wake up and find we turned into Argentina some over the prior decades. It will probably be a pretty nice lifestyle for those who already have wealth and were able to preserve it. For the rest, well, they voted for it…

  39. Posted by diemos

    Yeah, I’ve always thought that Argentina was a good model for where we were going. Ah well, you don’t get to choose the age you live in.

  40. Posted by San FronziScheme

    Argentina had the US economy to anchor itself when the going got too rough. But what will the US economy anchor itself on? China? Europe? It’s a global meltdown.

  41. Posted by EBGuy

    LMRiM, Thanks for the heads up on the the 529s.
    It’s not wealth, it’s an unemployment insurance policy.
    FWIW, isn’t this also a “poor man’s earthquake insurance policy”? We’re looking at 150 years of destiny over here on the Hayward.

  42. Posted by Trip

    Re the discussion above between LMRiM and Anon, good lawyers advise their clients on how to protect assets in situations like this all the time. Let me give you one example that is quite common. Florida has an unlimited “homestead exemption.” This means that if you are a Florida resident and file Chapter 7 or 13, ALL equity in your Florida home is exempt from creditor claims. Crazy, but true — I think California’s is only something like $60,000, and it’s remarkable that Congress permits individual states to dictate this point regarding federal bankruptcy law. So what do you see people with significant assets doing all the time when they are in financial trouble, generally advised by their attorney? They move to Florida two years and one day before filing for bankruptcy, buying the most expensive home they can find and paying cash for it. Then they have Florida residency and they can stiff their creditors, keep 100% of the home, then sell it when they emerge from bankruptcy and keep the cash.
    Ethical? My two cents is from the attorney’s standpoint it would be unethical — and a malpractice risk — NOT to advise your clients of these options. Sure, one need not (and must not) further a fraud, but in gray areas lawyers are ethically bound to do what is best for the client, not his/her creditors.
    (Of course, paying cash for a big home in Florida may not be the best asset-protection measure these days . . .)

  43. Posted by LMRiM

    Yes, Trip, the “O.J. Simpson” strategy re: Florida real estate. Just how does he maintain his lifestyle with the Goldman civil judgment hanging over his head… (well, at least he “did” maintain his lifestyle until he got thrown in jail for whatever it was he was doing in las vegas…)??
    Funny you should mention Florida. I think I have posted that we are looking to buy a Florida SFR later this year (primarily for family and personal use). It’s too bad that the $15K tax credit seems to have been dropped from the “porkulus” plan. That sort of misguided policy would have been a gift for high asset/high earners, as the vast majority of families in the US taking the mortgage deduction don’t even have $7500 of federal income tax liability, to say nothing of $15000. It looks like they are keeping the sales tax deduction for automobile purchases, though, another foolish policy that we will actually take advantage of this year.

  44. Posted by Trip

    Burt Reynolds also used the “Florida exception” when he filed for bankruptcy.
    Yeah, the $15,000 tax credit was a useless giveaway. But it looks like they’ve kept in some AMT changes. I’ll still have to pay AMT, but less now. And at least our banking clients are being kept alive on the public’s dime so they can pay their (incredibly high) legal bills!

  45. Posted by Rillion

    Yeah that $15k tax credit thing was silly, not that I wasn’t already figuring out how to try to exploit it, perhaps a cheap property in Florida bought with my 401k funds (might as well get them out now if there was a 15k tax credit to use up rather then wait until I retire when I expect tax rates will be much higher as we pay off all this debt.
    Seriously at this point, getting what you can from the government is going to be the best game in town.

  46. Posted by Trip

    Since this thread has morphed into an all-things-stimulus-discussion, here is another. What the US gummint giveth, California taketh away. Looks like Arnie and the legislature have a deal:
    http://www.sacbee.com/topstories/story/1616862.html
    So the Fed gives tax breaks for car purchases to stimulate auto sales, and the state then nearly doubles the vehicle tax to depress them. The US includes sundry other giveaways to stimulate spending, and the state adds another 1 cent to the sales tax and ups the income tax to un-stimulate it. And we’re going to borrow against future lottery revenues, and on and on. I never thought I’d say this, but I hope the Republicans stand firm.

  47. Posted by Rillion

    Hey as they increase the state income tax it saves homeowners even more money for their deductable expenses! The state is trying to pitch in to help bring the rent to own calculations back into line. :)

  48. Posted by Rillion

    To update, I just received a letter from EMC letting me know that they have once again decided to freeze my HELOC. The form letter is a bit confusing but the stated reason appears to be that they believe the value of my condo has fallen from its original appraised value. I’m saving the letter and going to use it when I request a reduction in my real estate taxes, maybe this year I’ll get a break.

  49. Posted by DS

    You can’t count on a bankruptcy court saving you if you made a transfer into a homestead with the intent to hinder, delay or defraud a creditor. So its really like 10 years for the situation you are describing, not 1,215 days (3 years 4 months).

  50. Posted by Rillion

    Wow, way to post to a very old and very dead thread….
    Of course reading through this brings back memories. But just to update, I ended up using most of the money as a downpayment on a new car. Timed it so that I got to deduct the sales tax (saved almost $500 in this year’s tax return) but also got it done before CA up’d the sales tax last year.

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