Thinking about a high-rate CD at Countrywide?

They're running advertisements for 5.65% 12-month CDs ($10,000 minimum). Amusingly, the ads mostly play up the FDIC protection.

I don't know if I'd bite, though, after reading Gretchen Morgenson's latest article in the Times on Countrywide's -- and there's just no other word for it -- sleazy business practices.

Read the article for all the details, but one thing stands out in my mind. Countrywide's PR people have spent a lot of time talking about how hard Countrywide is working to help borrowers avoid foreclosure. It turns out that Countrywide considers cases where the customer turns over the deed to the property to the Countrywide to avoid foreclosure, or agrees to sell the house for less than the loan balance and turn the proceeds over to Countrywide, to be "loan modifications".

Of course when Countrywide talks to investors, it's out of the other side of the corporate mouth:

Even as Countrywide maintains that helping its borrowers modify their loans is its top priority, its investors have heard a slightly different story. In a conference call with analysts and investors in late July, Kevin Bartlett, Countrywide’s chief investment officer, counted about 2,000 loan modifications done in June. Most of those, he said, involved deferring overdue interest or adding the past due amount to a loan. The company rarely provides workouts that reduce interest rates on loans, Mr. Bartlett told investors.

I'm not sure that I'd trust my money to company that's so clearly intent on exploiting its customers, and so disinterested in being honest about what it's doing, FDIC or no FDIC.

Happy pictures

Nominally, this blog is about money and happiness. One of the things I do to try to keep focused on the happiness side of the equation is using my cellphone to take pictures of things that make me happy!

Number one son, playing with a fog machine at the science museum


The woods near my house

Finally being finished working on the car!


My neighbor's meadow, mist rising at 6:30 yesterday morning

Escrow nightmare continues

Thank goodness it's not my nightmare: Lender Blames Others for Bounced Property Tax Checks.

See my earlier post for more on this fiasco. Mortgage escrow accounts. Just say no.

$100,000

So is a family with a household income of $100,000 a typical middle-class family? Upper-middle class? Rich?

In an earlier post, I wrote about what various retirement planning methods characterize as "enough" retirement savings for what I -- somewhat tongue in cheek -- called a typical family:

Today, a quick look at what the typical* family has saved for retirement. (*By typical, or course, I mean like me: 45-year-old head, income around $100,000.)

Grace over at Graceful Retirement took me to task, both in comments and in her own post for this statement:

Bluebird thinks that his is a typical middle-class family. He's 45 and makes around $100,000. I dunno about that. Maybe it's because he lives on the east coast, where family homes sell for $400,000. But while he's middle-class, I don't think his income is typical.

Well technically, what I said was that my family has a household income of "around" $100,000. So how unusual is that level of household income for a family? In the part of Massachusetts in which I live (the suburbs outside of Boston), the median household income for households where the head of household is between 35 and 44 is more than $80,000. For families headed by 45 to 54-year-olds, the median approaches $90,000. So $100,000 is clearly not an unusual family income.

And what is life like for the typical family with an income of $100,000?

Charles Farrell, author of the Elegant Road Map to Financial Health and Retirement, uses the $100,000 family with a 45-year-old head as his typical example family. Part of his article is a description of the typical household budget for such a family:

At first glance, this does not appear to be a particularly luxurious lifestyle. A mortgage of $140,000 might fund the purchase of an average house (away from the Northeast or West coast anyway), and $525 for payments on two cars isn't Mercedes territory (heck $525 won't even get you one Mercedes).

And with all that, there's a gaping hole:

Children's tuition  (Private School)       $0
College savings for 2 children             $0
Child care                                 $0

According to Census data (cited in this Wikepedia entry), the median number of earners in households with incomes of $100,000 (national sample) is 2, so our typical $100,000 family has two people working to generate that income.

And that means child care.

Perhaps eliminating the entertainment ($500) and vacation ($250) items could fund child care (two kids, $750 a month?), but that still forces you to choose between saving for retirement and saving for your kids' college educations.

And of course if you live in the high-housing-cost Northeast or Southwest, chances are that your mortgage and property tax expenses are going to further erode your ability to save for retirement and college.

So yes, $100,000 is a lot of money. But for many families, it also feels like barely enough.

Anxiety industry

All I think about (or write about) is retirement savings. Do you have enough? What is enough?

In my previous post, I identified three tools that you can use to assess whether your retirement savings are sufficient. Today, a quick look at what the typical* family has saved for retirement. (*By typical, or course, I mean like me: 45-year old head, income around $100,000.)

The Fed's 2004 Survey of Consumer Finances (SCF) lists $104,000 as the 85% percentile of household income (page 4). On page 14, the median value for retirement assets (all types) at the 85th percentile of income is $70,000. The median value of retirement assets for households headed by 45-54 year olds is $55,000. By way of comparison, the median value of retirement assets for households at the 95th percentile of income ($184,800 per year) is $182,700.

The Vanguard group publishes an annual summary of all participants in defined contribution plans (401(k), 403(b) that it manages. There's a wealth of data about plan participant behavior, but for today's purposes, two data items of information are relevant: Median account balance for household incomes $100,000 and up is $58,406. For households headed by 45-54 year olds, median balance is $44,093. The Vanguard numbers, of course, only include individual assets held in the Vanguard plan. Vanguard estimates that for about half of plan participants, the Vanguard balance represents between 75% and 100% of all retirement savings.

Finally, Fidelity publishes an annual Retirement Index, based on a population survey. The results for the 2007 index are pretty crude, compared to the Vanguard and Fed data. For households headed by 43-61 year olds, median earned income is listed as $70,000 and median retirement holdings $45,000.

So if you pull these numbers together, the overall retirement holdings for our "typical" $100K per year middle-aged family are probably between $65,000 and $100,000.

Now let's consider what our estimators indicate that this family should have saved and be saving:

Farrell says that the family should have $450,000 accumulated in retirement assets, should be saving $1,000 per month, and should have a total debt (including mortgage) of no more than $100,000.

NSRG says that the family should have $300,000 accumulated and should be saving $1,291 per month. Conversely, if the family has $70,000 in retirement assets accumulated, it needs to be saving $1,970 per month (well in excess of the statutory limit of $15,500).

Fidelity's MyPlan computer says that the family should have $550,000 saved for retirement and be saving $1,291 per month (the statutory limit).

So obviously there's a huge disconnect here between what people have saved, and what they need to have saved.

More on this topic to come.
________________________
* Also, obviously, Fidelity's estimator is designed to make things look worse than they really are (mostly because it makes a very unrealistic assumption about household income growth). After all, it's a sales tool.

Failure to launch

I must have ten unfinished blog posts floating around in blogger, but it seems that no matter how hard I try, I can't get any of them finished. So maybe this morning, since I'm up and the rest of the family is not, I'll just try to list the stuff I've been thinking about.

CEO-Targeted Advertising

In this morning's Journal, a full page ad from Mercer (a business consulting firm), offers to help CEOs with the ticklish problem of dumping their pension plans:

You can freeze your company's retirement plans, but you can't freeze your financial responsibilities...or your employees' plans to retire.

It's tough at the top, I guess.

Claire and Me

One of my favorite PF bloggers is Claire, over at Tired but Happy. For some reason, her writing about the personal and financial trials of raising a family with a small child really resonates with me. Maybe its because we both of sons around the same age (hers is 3, mine are 4 and 1). My favorite posts are when she writes about the eternal human desire to see how you measure up against your neighbors. This is something I grapple with endlessly. By any rational standard, we've got plenty of money, but it happens that we live in a rich town in a rich state, and it just seems like everybody has more (or at least spends more) than we do.

Median -- median! -- household income for households headed by 35-44 year olds: $199,000. Insanity.

Broke

On a related note, we are broke! Because of series of unexpected household expenses, the high price of gasoline, some medial expenses, and increased preschool bill, our income has not kept up with our expenses over the past 9 months. In fact, we're about $4,000 in the hole. This deficit hasn't caused our household net worth to decline, since we're putting the maximum into our 401(k), and we've seen reasonable investment returns this year, but it has represented a shift in assets out of taxable into tax-deferred accounts.

To try to deal with this faintly worrisome development, I've undertaken some expense management steps:

• Switch from supplemental life insurance at work to term policies ($300 per year)
• Increase auto deductibles and obtain maximum discounts for low mileage ($325 per year)
• Switch from indemnity to HMO option on health insurance (takes effect next year, $1100 savings)

And I'm also considering reducing the amount of our 401(k) contribution. What!?!!?? Heresy! Well, you clearly need to save "enough" for retirement, but there's no particular point in saving "too much." But how do you figure out if you're saving enough? The three best methods that I've found are:

• Fidelity's interactive computer. (Probably overstates what you'll need.)
• Farrell's elegant method. (Simple, perhaps too simple)
• The National Savings Rate Guidelines. (Best overall, but complex to use.)

When I use these methods, it looks like I am probably saving more than I need to, although since I'm OLD and I have small children, I've been lumping college savings into retirement vehicles as well (I'm thinking of switching some of the 401(k) contributions into a Roth as well, since it makes it easier to get the large lumps required for college bills without incurring a big tax bill as well.

Well, that's at least some of what I've been thinking about. I hear the sounds of small voices upstairs, so that's all for now.

Icky, icky gift

In another lifetime, there would be a great new post this morning, because I would have, at my leisure, read the Sunday Times and Globe over the weekend, had a chance to reflect, and then write about some news or event or trend of interest.

Instead, this weekend was a pair of 14-hour days of adventures with the kids, house projects, and car projects.

But we, or more properly Mrs. Bluebird, did receive an interesting bit of mail over the weekend. A $10 gift certificate to JC Penney from our credit card company (an REI Visa card through US Bank). The certificate contained a list of excluded items that was so long that it might have been quicker to list what was covered:


Along with this warning:

Let's try to parse this.

By using your REI Visa card to redeem this offer, you are disclosing to JCPenney that you carry this card and you exhibit similar spending behavior to JCPenney customers.

What on earth could this mean (other than the clearest indication yet that we're living in the wrong town)? I mean we already shop at JC Penney (and Sears and Target, and sometimes at Wal-Mart), so presumably they already know who we are how pedestrian our shopping habits are, and of course they already know that we have an REI Visa card. Is there some secret JC Penney society that we don't know about?

As posted elsewhere, I definitely have a love-hate relationship with US Bank. I'm happy to take their money, but every time I deal with them, I feel like sword of Damocles hanging over my head.

A riddle, wrapped in an enigma...

So there I was, reading a post in Boston Gal which linked to an article from WWD about the new Natick Collection. The article talked about the demographics of the communities around the new upscale mall:

Natick has a median household income of $141,818 and it is near other six-figure towns, including Wellesley ($113,686) and Weston ($153,918).

Now whoever wrote this article clearly had never visited Natick or Welleseley (for example, when was Natick relocated to the "...juncture of Interstate 95, the Massachusetts Turnpike and Route 9?" Juncture? Huh?) A quick trip to the excellent MASSstats.com site revealed that Natick's per-captia household income is $69,755 while the $141,818 figure belongs to nearby Dover.

So fine, WWD has outsourced their reporting to Bangalore. Whatever. Except here's a bit of data for some Massachusetts towns near the Natick Collection (MASSstats.org is addictively interactive):

Town          Median Household Income          Median Home Price
============= ================================ =================
Framingham      $54,288                              $380,500
Natick          $69,755                              $449,400
Wayland        $101,036                              $590,000
Wellesley      $113,686                              $950,000
Weston         $153,918                            $1,200,000

The minor mystery is why is the ratio of median household income to median home sales price so consistent (about 7) across this diverse set of communities? But the major mystery, is why is that ratio so high? I mean how does the median Weston household afford a $1.2M house on an income of $153,000?

I mean do the math.

Let's say you have $600,000 to throw at the down payment, so you only need to borrow $600,000. Your monthly payment on a 30-year fixed loan would be $3,792. Property taxes? $1,050 a month. Hazard insurance, call it $100 a month. So your monthly PITI nut would be $4,942. If you assume the traditional qualifying ratio of 28% for PITI to gross income, you would need $17,650 per month, or $211,800 per year to qualify for that loan. And that's assuming you can put $600,000 down.

One reason for this apparent disconnect between incomes and house prices could be recent, unusual disparity between the rate of income gains and house price gains. It is possible that the median homeowner has been in his house for, say, 6 years. In those six years, the rate of home price appreciation has been so much faster than income growth that homeowners wind up living in houses that they couldn't possibly afford to buy now, but which they were easily able to afford a few years ago (better keep that homeowner's insurance paid up).

Or it might be crushingly huge mortgages.

(Actual crushingly huge mortgage on expensive house.)

Mortgage escrow disaster

From today's Journal: Mortgage Lender's Bankruptcy May Threaten Thousands of Homeowners

Thousands of homeowners face an "imminent risk" of losing their homes because of clashes between American Home Mortgage Investment Corp. and its former financial backers, according to Freddie Mac, a government-chartered housing financier.

In documents filed with the U.S. Bankruptcy Court in Wilmington, Del., Freddie Mac said it seized $7 million that homeowners sent to American Home to cover principal and interest payments, property taxes and insurance just before the company's Aug. 6 collapse. American Home quit making payments to tax authorities and insurance companies Aug. 24.

What a nightmare. Freddie Mac seized the actual escrow accounts (which, of course, aren't an asset of the company, so aren't in play in the bankruptcy), but the company won't release the information required to actually make the payments. Apparently, the company is hoping to auction off its servicing business, which is worthless without the files, so it's stonewalling Freddie Mac.

Borrowers, who have already paid into these escrow accounts for the property taxes and hazard insurance, now are potentially faced with needing to make those payments again in order to avoid foreclosure by insurers or seizure by taxing authorities.

As described in an earlier post, mortgage escrow accounts are a great business for lenders but a crappy deal for borrowers. I had no idea just how bad they could be.

* What an irony, of course, that borrowers in this situation might be forced into bankruptcy under the new, creditor-friendly bankruptcy law because of the sleazy exploitation of the same laws by their lender.

Sleazy behavior to make $5

So it's time to order new checks, at least that's what it says on the little "time to reorder" slip that popped out of the box of checks this morning.

So I call the 1-800 number to order two boxes of checks. The total is $34, which seems ridiculous. Turns out that that includes $14 for "trackable delivery", which means putting the two boxes of checks in a mailing envelope and shipping it FedEx ground, instead of throwing the two boxes in the US mail.

Which is bad enough, but then I have to sit through a ridiculous hard sell when I try to decline this extra charge.

What I can't figure out is how it makes any business sense to go to this effort to make, at best, $5? I mean once you buy the envelope and pay FedEx you're already out nine bucks or so.

Also irritating is the fact that my bank, which I truly love, has outsourced this business function to such a bunch of lowlifes.

I guess what it really means is that next time, I should take the time to locate a reasonable low-cost check vendor.

Prescience

In an amazing coincidence, here's an article in today's Globe that provides another link between losing weight and saving money. The US recently clarified the rules relating to companies' providing financial incentives (and penalties) for workers related to their health status:

Employers wary of risking legal problems feel more confident after federal regulations were finalized July 1 covering how wellness programs can comply with nondiscrimination requirements under the Health Insurance Portability and Accountability Act. Rewards (and therefore penalties) based on health factors cannot exceed 20 percent of the total cost of employee health coverage...Cincinnati-based Western & Southern Financial Group adds between $15 and $75 monthly to the insurance cost of health plan participants according to their BMI scores.

Emphasis added. My health insurance premium is $146 every two weeks, and that covers about 25% of the total cost of my health insurance. Twenty percent of that would be $746 -- an amount of money sufficient to get my attention.

Before you do anything else...

Before having baby #2, it was pretty easy to come up with a post nearly every day. But now, it seems like there just isn't the time. I'm working on some excellent posts about the nuts-and-bolts of personal finance (like how to manage lumpy expenses, how to track credit card spending so you aren't ambushed by a big bill, and how to balance a checkbook), but in the mean time, I thought I'd write about how incredibly unimportant it is to save money for retirement.

Yes, unimportant.

If you ask most old people (and I am one of those old people*) whether they'd rather have money or their health, they'd say their health. Well actually they'd say both, but if they could only have one, it would be health. The reason is simple: if you're healthy, you can make money. You only really need retirement income if you can't work. Now if you're saying, "I hate working -- I can't wait to retire" then maybe you should take a look at what you're doing for work. I mean what's the point of going to work every day if you don't enjoy it, at least a little bit?

So what can you do to make it more likely that you'll be healthy when you're old?

1. Quit smoking (This is such a no-brainer, I can't even believe that I'm mentioning it. Except that I used to smoke (before I was 30), and maybe you do too.)
2. Maintain a healthy weight.

Of these two, keeping a healthy weight is probably more important. Why? If you smoke, you increase your risk of dying prematurely, either from heart disease or cancer. Premature death is a fool-proof solution to the problem of retirement income. Being overweight, on the other hand, is associated not just with premature death, but with disability and chronic illness, particularly type-II diabetes.

If you met me in person, you'd probably think that I was one of those tall skinny guys who can eat whatever he wants. In fact, I'm one of those people who merely needs to walk by a pizza, and suddenly my pants won't button. A couple of years ago, I decided to drop some weight (to see if it would help a chronic back problem, which it did). I experimented with several different weight loss techniques, and now, as a public service, I am unveiling the

Bluebird of Happiness Weight Loss Plan

1. Decide that it's worth the effort. Your current weight is your "natural" weight, based on who you are, what you eat, and what you do. To lose weight, you're going to need to make some changes. So make sure it's worth it.
2. Buy a decent scale and weigh yourself every day. Pick a consistent time of day (like before you get in the shower), and weight yourself every day. You'll see that your weight fluctuates by several pounds a day, but after a week or so, you'll see that it stays in a consistent range. Your mission is to move both the lower and upper limit of this range downward.
3. Cut the crap out of your diet. This is easy. Observe what you eat, and eliminate the worst thing you eat every day. It might be the greasy Chinese food at lunch, the latte in the morning, or the bag of Cheetos on the couch at night. Just eliminate one thing per day.
4. Never use the drive-through. Park the car and go into the store, bank, or whatever. Even if you've got two small kids. (Especially if you've got too small kids: excellent upper body workout.)
5. Never look for a parking space. Always park in the first space you find.
6. Stop taking the elevator. You can work your way up on this one. Start by saving the elevator for trips of more than 2 floors, then 3 floors, and so on.
   
7. Stop taking the car. Walk whenever and wherever you can.
   
8. Eat a high-fiber snack between meals. Have an apple in mid-afternoon. Snack on some Cheerios in mid-morning.
9. Repeat steps 1 and 3 until your healthy weight lies within your daily weight range, as determined in step 2.
   

Beyond increasing the odds that you'll enjoy a long, healthy, active, remunerative, and productive middle- and old-age, keeping a healthy weight can help save money today as well:

• Type II diabetes treatments (big pharma loves chronic diseases) are expensive, and you need to take them every day.
• You will spend less on food.
• You may be able to eliminate your gym membership (why spend $100 a month to walk on a treadmill when you can walk outside for free?)
• You will spend less on gasoline

Now of course, there are no guarantees. You can live a healthy lifestyle and still become ill or disabled at any age. But keeping a healthy weight makes illness and disability less likely.

* I'm so old that I used a slide rule in high school science classes.

Mortgage Troubles

If you're having trouble paying your mortgage, chances are that asking the lender to restructure the loan will result in the big shrug: "We don't actually own the loan, we just service it, so we have no ability to modify the terms."

But suddenly this has changed, simply by virtue of a press release issued by this coalition of banking regulators:

• The Federal Reserve
• The Federal Deposit Insurance Corporation (FDIC)
• The Office of the Comptroller of the Currency
• The Office of Thrift Supervision
• The National Credit Union Administration
• The Conference of State Banking Supervisors

The press release basically encourages servicers of securitized mortgages to apply standard loss-mitigation strategies to loans that are headed toward default. These strategies include

• loan modifications
• deferral of payments
• extension of loan maturities
• conversion of adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate mortgages
• capitalization of delinquent amounts

For borrowers in trouble, this seems like straight-up good news. If you can convince your lender that there's a good chance that you'll default on your mortgage, he's much more likely to help you out in a substantial way.

What's less clear is what this is going to mean for bondholders and loan servicers. The operative phrase in the press release seems to be "...when default is reasonably foreseeable..." Even though the release was not issued by the SEC, it states that

The Securities and Exchange Commission (SEC) has provided clarification that entering into loan restructurings or modifications when default is reasonably foreseeable does not preclude an institution from continuing to treat serviced mortgages as off-balance sheet exposures.

I don't know enough about finance (read disclaimer at the bottom of this page) to be sure, but this sounds like a way for mortgage-backed bond holders to write down the value of the bonds without actually incurring the damage on their balance sheets. I suppose this could work, for a while, but if the default rate rises beyond what people expect, it seems like this could cause bigger problems down the road.

Fleece me! No, not him, me! Fleece ME!!!!

From the Journal (subscription) comes an article about the hue and cry from "mom-and-pop" investors over the SEC's plan to raise the bar for individuals to invest in hedge funds. Currently you need a net worth of $1M; the SEC wants to raise the requirement to liquid assets of $2.5M (exclusive of primary residence).

Apparently there is resentment amongst the hoi polloi that only the "rich" are being allowed to "get richer" by "investing" in hedge funds. Coincidentally, in today's Times, there's an article that talks about the fact that compensation for hedge fund managers is so high that it is skewing the salary statistics for the entire industry. For example, the average weekly wage for all workers in the investment banking industry in Fairfield County Connecticut is $23,846. That includes the receptionists, support staff, IT drones, all of them.

Personally, I am just itching to invest money in hedge funds. I am extremely confident that any investment manager who is being paid under the standard 2-20 scheme (he pockets 2% of all the invested money, plus 20% of all profits in excess of an index target, typically the S&P 500), is sure to do a great job and make lots of money for me.

I take no position with regard to the SEC's move. I think that the lower the bar for hedge fund investors, the more hedge funds will come into being that specifically target less-sophisticated, lower net worth individuals. And we all know that providing more choices and innovative new financial products, especially for middle- and lower-income Americans, helps the buyers of these products live better lives, helps to strengthen the global economy, and just as a coincidence, allows the financial services industry to make a boatload of money.