Big Brother, Big Banks, Big Insurance, Big Profits on the Backs of Declining Middle-Class

Although the economy is doing well, and the unemployment rate is low, there are still millions of Americans living paycheck to paycheck. Some estimates are there are 45 million Americans who are living in poverty, depending upon how poverty is measured. Even though there is much more technology and productivity these days, the median family income is $5,000 lower than 20 years ago.

Half of Americans have less than $10,000 in savings and millions do not know how they will ever be able to retire. Real unemployment is probably close to 10%, when you count all the people who are not able to find work and have to settle for part time.

Of course, Wall Street and the big banks are doing well. Some argue that greed, recklessness and illegal behavior were major factors in driving the country into a very bad recession. Millions of Americans lost their homes, jobs, savings and the ability to send their children to college. Today, the middle class is still suffering somewhat the effects of what financial institutions and insurance companies did to the US 10 years ago.

Since the market crash, it has become common to read about large financial institutions being fined or reaching settlements for questionable behavior. During the financial crisis, taxpayers were told that they needed to do bailouts for these big financial institutions because they were too big to fail. The argument was that if they went down the tubes, we would have a depression.

Still, three of the four biggest financial institutions in the country today – Morgan Chase, Bank of America and Wells Fargo – are 80% bigger now than they were in 2007 a year before US taxpayers bailed them out.

Many argue that no one financial institution should be so big that the failure would cause a major financial risk to Americans and to the US economy. No one financial organization should have such large holdings that the failure of it would spiral the world economy into a crisis.

As of 2016, there were only six huge financial organizations that had assets of $10 trillion. This is 60% of the country’s GDP. These large banks deal with 2/3 of the credit card purchases in the country and write 35% of home mortgages. They also control half the bank deposits in the US.

Some argue that if Teddy Roosevelt were alive he would break up these big banks, and some politicians have proposed to do so in the past. There have been bills written that would mandate financial regulators within a year to identify and break up giant banks and financial institutions such as JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley. The idea behind this would be that they cannot cause another financial crisis like the one that swamped the country in 2008.

That legislation, while it has not been passed of course, was endorsed in 2015 by the Independent Community Bankers of America that represents 6000 banks. Their support was a big recognition that banking functions should be boring and the situation today still has too much risk and, some would say, too much stress on making money.

Many argue the function of banking should be to provide affordable loans to people and businesses so that jobs can be created, and also for people to be able to afford to buy homes, cars and so on.

Another problem with the current regulatory environment is that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, while it was intended to banish financial institution abuses of consumers, it has led to more problems for middle class taxpayers. Recent research has showed that after Dodd-Frank, the number of mortgages given to the middle class dropped by 15%, but for the wealthy, they increased 20%. It was determined that Dodd-Frank changed mortgage lender origination behavior, as it increased the costs of originating loans.

Lenders were faced with more costs of origination and costs of compliance even before Dodd-Frank was passed. It makes sense that lenders began to focus more of their business on bigger loans for wealthier customer, so the lenders and banks could make more money. Big lenders also may offer more financial services than smaller banks, so it makes sense to acquire wealthy customers as they make the banks more money. Thus, the biggest drop in loan originations for middle class buyers was for the big banks.

When politicians promote new financial regulation, the general aim is to protect consumers. But it is important for regulators to be aware of the changes of incentives of private companies who will react in their own ways. In the case of the Dodd-Frank law, many middle-class taxpayers found that they were unable to get cheaper mortgages after the law was passed. In fact, many of them were unable to get a mortgage at all.


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California Fire Victims Getting Support from State and Federal Agencies to Rebuild

At the end of 2017, there were serious wildfires in northern and southern California that affected Los Angeles and Ventura counties in the south. Hundreds of homes were damaged or destroyed and thousands of people are still in need of help. Some of these people had their homes burned to the ground.

The fires are thought to be because of Santa Ana winds that can reach hurricane levels, and also the mountain ranges in southern California. These can trap cold coastal air and create conditions that are ripe for wildfires on the Los Angeles area. As of December 2017, at least 120,000 acres of land was burned and 200,000 had to leave their homes.

Some areas are getting support from the government to rebuild, but not in every case. With the cost of wildfires in the state growing, some areas want to pay home owners to not rebuild their homes. Or, they want to use more economic pressure to encourage people to not rebuild in fire-prone areas. The state saw in 2017 the most destructive year of fires in decades. More than 15,000 structures across the state were destroyed or damaged, and 45 people died. Some researchers with the California state government think there could be more of this to come as the climate continues to warm.

Some environmentalists in the state argue that mayors and legislators in cities across the state that were affected by the fires should consider buying up land before it is built on. If a fire comes through, the land should be bought up, so it cannot be built on again.

The question of whether or not to rebuild is a challenging one for the state. People like to build in areas that are close to nature with lovely views and some degree of remoteness from the big city. Some of the neighborhoods in California that burned down in 2017 had fires before and were relatively undeveloped. Homes that are rebuilt in those areas could be at risk again for fire; experts say fire cycles are shortening now in California from decades to just years. But thousands of property owners are dealing with losing their home and possessions, and it is difficult for them to be asked to give up their land and not rebuild there.

Any new state policies that could increase the cost of building in areas prone to fire could raise the cost tremendously for many middle-class people to buy their home. Many of them will be priced out of the market.

In the Santa Monica Mountains, there have been 500 new housing units that could be built near Los Angeles that is in a high fire hazard area. These are homes in the $1.5 million range so are not low income. Some in the state government say the developer of the homes should have a way to mandate buyers will have to pay for more fire protection that will be needed.

Resources Available to Help Fire Victims in California

For homeowners in California who are indeed going to rebuild, there are some resources available from these state and federal government organizations:

  • Governor’s Office of Emergency Services – maintains information about status of fires and the cleanup process
  • California Department of Forestry and Fire Protection – this provides fire summaries for any active fires on the state
  • Employment Development Department – Employers that are affected by a fire can get a 60-day extension from the EDD to file a payroll report or to deposit payroll taxes without any interest or penalty
  • Federal Disaster Unemployment Assistance Benefits – workers or those self-employed who have lost jobs or had hours cut in Lake, Napa, Nevada, Orange, Sonoma, Yuba and Butte counties, you can receive these federal benefits by applying through EDD
  • Disaster Loan Assistance – The SBA at the federal level offers long term, low interest disaster loans to businesses, renters and homeowners to repair or replace damaged property
  • California Department of Tax and Fee Administration – tax relief is being offered to those affected by fire. You can request relief from interest and penalties
  • Office of the State Treasurer – Rolling out programs that will help communities affected by the fires get more access to financial resources
  • USDA Rural Development – This federal agency has several programs available to help rural communities that have been affected by disasters.
  • California Department of Motor Vehicles – Offering help to people who have lost their DMV documents as a result of fire


The bottom line is that there is a lot of rebuilding going on in northern and southern California and plenty of help is available from state and federal partners. However, it remains to be seen if rebuilding will be encouraged in the fire prone areas that the state designates especially high risk.



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Should I Ever Get a Mortgage with PMI?

2018 is still looks like a good time to buy a home with less than a 20% down payment. More than ever in the last several years, mortgage lenders are offering low down payment loans, with loan approval rates markedly higher than 2010.

For buyers who have less than 20% to put down, though, you need to think about private mortgage insurance or PMI. In most cases, PMI is required on all conventional loans with less than 20% down. PMI is a required insurance policy for conventional loans that insures the mortgage lender against loss if you default.

PMI differs from the mortgage insurance needed on other loans, such as FHA mortgages. Mortgage insurance on FHA loans can be costly as the premiums are higher than Fannie Mae and Freddie Mac. There also is a separate mortgage insurance program for USDA home financing.

Many Americans hate the idea of paying PMI. But is PMI good or bad? It is neither, really. Mortgage insurance IS an extra monthly cost, but it helps millions of people qualify for a loan years before they otherwise could. Only a small percentage of Americans can afford to put 20% down on a home, and it is even smaller for first time home-buyers. Let’s consider both sides, the home loan that requires mortgage insurance and the no PMI mortgage.

Should you ever get PMI with a mortgage? There are cases where it does make sense to choose a home loan with mortgage insurance.

When PMI Is Required

PMI is needed when the buyer puts less than 20% down on a conventional loan. Conventional loans are backed by Freddie Mac or Fannie Mae and are available through major home lenders such as Wells Fargo, Bank of America and JPMorgan Chase, etc.

To understand why PMI is needed on a loan with less than 20% down, it helps to review the mortgage default situation. The homeowner is not making payments on the home, and at least three payments were missed. This is creating a big loss for the lender. But state laws often delay when the homeowner can be evicted. It might be one or two years before the home can be reclaimed. During this period, the home could have damage, such as neglect, fire or flood. It probably is showing the effect of poor maintenance.

When the home is sold in a foreclosure auction, it probably means the lender has a big loss on its hands. On average, lenders lose about 20% of the value of the property during the default and foreclosure. So that is why it is a requirement to put down 20% to avoid PMI. Anything less than 20% down is a risk to the lender. PMI protects them against that loss.

Types of Private Mortgage Insurance (PMI)

There are three major options for paying for PMI. The first is the single premium option that means you are paying a lump sum when you close the loan. This will cover the cost of PMI for the entirety of the mortgage.

The second option is lender paid mortgage insurance or LPMI. This does not require you to make monthly insurance payments but your rate will be increased by the lender to cover the risk.

The third option is monthly premium PMI which is how most of us pay for it. The annual cost of your PMI policy is split into 12 payments and collected monthly.

All of these options have advantages. If you plan to stay in your current loan for a long time and expect home prices to stay flat or go up moderately, you may want to opt for the single premium plan. But if you want to move or refinance in a few years, you may want LPMI. This means you are only paying the slightly higher rate for a limited period.

For most buyers, monthly PMI is probably the best bet. Payments are monthly and will cancel once you reach 20% equity through payments and/or appreciation.

Cancelling PMI

A lot of buyers think PMI is stupid and a waste of money. But it lets you buy the home with much less than 20% down. Do you have other things you could do with that money? Most people do. You could use some of that money to pay for repairs on the home, keep an emergency fund or put into investments. Access to PMI lets more people buy homes, and in particular, lowers entry barriers for the first-time homebuyer who has no equity.

PMI does add to your monthly payment, but that is ok for most people. They can afford PMI payments; what they cannot often afford is a 20% down payment.

Plus, once you have paid down the balance to 78% of the home’s original purchase price, you can have the PMI cancelled automatically by law. You also can ask the lender to cancel it once you reach 20% equity, but they may wait until 22% equity.

To qualify for PMI cancellation, you have to have made your payments on time. Otherwise, the lender may balk at cancelling PMI.

Overall, getting a mortgage with PMI makes sense for people who would struggle or find impossible putting 20% down on a home, especially first-time buyers.