0 What Happens When Your Bank Closes?

A question that have crossed the minds of people who have a savings account, credit card, or checking account at any bank is, what will happen to their account in case the bank closes? As your bank works to grow the money you invested over time, there still comes a risk, although a relatively minimal one. Banks can sometimes make a bad decision and lose money. In the event that your bank would have to close, you will also lose money you have invested. Thanks to a law passed by the United States government, you may still recover money you have lost in cases of such an unforeseen event.

The Role of FDIC

It was reported that back in 1930s during the Great Depression, a large number of people tried to withdraw all their money from bank accounts—events that was called “bank runs.” To better protect consumers, then US President Franklin D. Roosevelt signed the Banking Acts of 1933, which gave birth to the Federal Deposit Insurance Corporation (FDIC). The FDIC provides deposit insurance to protect individual accounts against bank failure. 

Depositing funds at an FDIC-insured bank secures investments and provides insurance in case the bank goes under. The best thing about it is that the investor can benefit from the insurance policy even if they don’t spend anything on premiums. The banks are the ones that pay premiums on behalf of their depositors. The premiums paid by the banks comprise FDIC’s deposit insurance fund, which is used for paying back losses to depositors. 

So how does the FDIC help when a bank is falling down? First of all, the FDIC will be monitoring the failing bank closely and takes charge of the bank through a conservatorship. Depositors will get a letter in the mail where they will be informed that their bank will be closing soon. The bank will then be turned over to the FDIC, which will try to sell the bank.

If the Bank is Sold

During the takeover, the bank may close down on a Friday and then open again on a Monday after it has been taken over. You may still use your bank ATMs, old checks, and debit cards up to the amount insured, but only for a limited time, usually a few months. 

Meanwhile, direct deposits will be transferred automatically to your account at the new bank. Certificate of deposits (CD) at a failed bank is insured for up to $250,000 by the FDIC. On the other hand, time-deposit CDs will still mature in the same period as agreed upon with the original bank because it’s considered legally binding. If you’re a CD owner, you need to check the mail for alerts. Acquiring bank will tend to decrease the rate. 

For closed banks, a check will be sent typically within a week. If yours is a checking account, you’ll need to order new checks from the new bank. You can also choose to close the account and move to another bank altogether, although you’ll  have to wait longer because the paperwork will take long to process. 

A standard money market account, which is very much like a savings account, will earn interest rate set by the bank and typically has a limit for the amount of transactions for its customers. It’s usually insured by the FDIC for up to $250,000.

The standard money market should not be confused with money market mutual fund, which usually consists of short-term CDs, including government or corporate bonds and treasury bills. Because these funds are investments held by mutual funds and are not bank deposits, they are not insured by the FDIC. If your money market deposit account is insured, expect your money to be inaccessible for several days. Interest rates may also be subject to change with the new owner.

Meanwhile, fiduciary accounts including brokered accounts, escrow accounts, Uniform Transfers to Minors Act, UTMA, accounts, Interest on Lawyer Trust Accounts or IOLTA, are insured for up to $250,000 by the FDIC. Fiduciary accounts are the accounts owned by one party but managed by another.

If the Bank is Not Sold

So what happens if the bank is not sold to any entity, you ask? You’ll get a check in the mail for the loss of up to the insured limit. However, during the time of processing, you’ll have to wait several days before you can get access to your money, or you’ll have limited access. Instructions will also be sent to you regarding  what to do with your safety deposit box.

How Much Will I Get?

If you are a depositor, then you will get an insured rate of up to $100,000 per bank account. This means that if the account is a joint account, you will get half of it. Meanwhile, if you have below $100,000 in the closed-down bank, you will be pleased to know that you’ll most likely be getting all your money back. The insurance covered by FDIC includes savings, money market, checking accounts, and CDs. The downside of it is that stocks, bonds, mutual funds, stocks, or life insurance plans aren’t covered.

If you have more than $100,000 worth of assets in the bank, a good precautionary measure will be to spread the funds across more than one bank. You can also maximize insurance on your funds by utilizing the various types of ownerships. IRAs are usually insured for up to $250,000. If you have bank assets worth more than $250,000, any amount beyond that is not insured.

Meanwhile, those who had no time to insure all of their bank funds may still get refunds from the FDIC, with an average return of 72 cents per dollar. 

What Happens To Your Loan?

In case you’re wondering what to do with your loans (credit card loans, personal loans, etc.) in case a bank closes down, you should definitely continue paying your loans according to your agreement with the bank. Just because a bank was sold to another entity doesn’t mean that you should stop fulfilling your payment obligations. It’s recommended that you continue with the payments and just wait for a loan statement from the new bank. The process of establishing a new entity might take some time.

0 Mortgage Forecast for 2013

In 2013, the mortgage industry has the potential for change for lenders, brokers and consumers.

The Financial Services Authority (FSA) and the lenders and intermediaries in the mortgage market are closer to establishing a workable set of guidelines with an emphasis on affordability and solid underwriting standards.

Lenders, not brokers, under the proposed guidelines, assume the role of assessing whether a consumer qualifies for a home loan. Credit is issued only under the circumstance when a borrow demonstrates a strong probability of meeting payments without dependence on rising housing prices.

Future fluctuations in interest rate are also considered when determining affordability. Borrowers are discouraged to enter agreements where they assume low interest rates will exist infinitely.

Customers who undertake interest-only mortgages must prove credible resources to meet the repayment schedule as well, outside of considering potential rising property values.

The institution is also working on establishing guidelines for business owners who raise capital via home equity loans to fund their entrepreneurial ventures.

Chairman of the FSA, Lord Adair Turner, believes these measures ensure enhanced lending practices in the future when memories of the past crisis fade and the temptation to engage in more risky credit practices reappears.

The FSA encourages the implementation of these new guidelines for 2013, enabling them to be established prior to future growth in the economy.

Mortgage industry leaders like Paul Broadhead at the Building Societies Association believe these measures protect the consumer, while also giving lenders proper discretion in determining credit-worthy customers.

Others remain skeptical, like Charles Haresnape, managing director at Aldermore Residential Mortgages, who is concerned why intermediaries have been given a pass to determine affordability in giving counsel.

Grenville Turner, chief executive of Countrywide, favors the measures to clarify which party is responsible for determining affordability, but he thinks the timing of the new standards is questionable.

He fears that the current market climate inhibits 39 of 40 potential customers from qualifying for  mortgage loans. To prevent further market sluggishness, he argues lenders need to become more flexible in assessing affordability for new applicants notwithstanding a solution for the self-employed and current homeowners trapped in negative equity.

The timing aside, the FSA seeks ways to facilitate the process for consumers navigating the mortgage application process. To reduce a daunting abundance of information, the organization has streamlined its prescribed disclosure requirements for lending institutions. These entities are mandated to share 'key messages' with the potential customer at the appropriate time, instead of using the Initial Disclosure Document (IDD).

Independent firms, according to the new FSA guidelines, are no longer mandated to offer their customers a ‘fee only' option. They must disclose to consumers whether they are mining direct-only agreements. Should these intermediaries desire to propose a direct-only deal, the FSA wants to eliminate the mandate to disclose a Key Facts Illustration, thereby streamlining the process for the intermediary.

In addition, lending firms must consider whether rolling fees into a credit agreement is suitable. Should the customer desire this method, the lender must move forward with the loan in this matter.

For non deposit taking institutions, the FSA seeks to implement capital requirements for these types of lenders. Non-bank institutions must abide by a more risk-based criteria, where the capital requirement is augmented. Subsequently, these firms will have to establish protocols and controls to manage their liquidity risk judiciously.

The FSA seeks to streamline processes for niche markets in lending as well, thereby galvanizing the entire industry. Under consideration are equity release products like lifetime mortgages and home reversion plans, high net worth lending, sale and rent back, home purchase loans, business lending and bridging finance. The FSA desires to establish clear guidelines for the niche markets as it does in the conventional mortgage arena, ultimately providing a consistent, straight criteria for its affordability standards, income requirements and other pertinent factors in determining credit worthiness.

1 The Bank Bail-Out: Saving America's Banks

Much is known about the near-collapse of the housing market and the financial ruin that followed some of America’s largest banks. The more disturbing story is not how America’s largest financial institutions nearly caused the largest recession in US history, but how in the midst of the federal government’s efforts to stabilize the financial industry, the people, whose houses were being foreclosed and the small businesses on main street that suffered, were left in the dust. By examining the issues surrounding the collapse of the housing market and the federal government’s response, it is clear that the regular Americans were sacrificed in order to save wall-street.

In 2006 a problem arose across America. All economic indicators showed that prices for individual homes were starting to go down across the board. In order to try to force housing prices to increase, the Bush administrations authorized the Fed to lower interest rates and change the rules that pertained to borrowing. These new rules allowed an increase in the number of sub-prime mortgages, mortgages issued to lenders who might have problems with repayment. The result was that many people who previously could not afford to own their own home were allowed take out a home mortgage loan, which caused home prices to increase to record heights. With high prices and record profits, home developers began construction on new housing projects with the hopes of taking part in the housing bubble.

However, government deregulation, the saturation of the market with new houses, and sky-rocketing housing prices coupled with unnecessary financial risks taken by banks caused the housing bubble to finally pop. Homeowners woke up to discover that the value of their home was substantially lower than when they had originally taken out their mortgage for the same house. Many homeowners, who under normal circumstances would not quality for a home mortgage loan and were intending to sell their homes for more than what it was worth, found that their home was upside down and began to default on their mortgage payment. Foreclosures hit a record high and banks found themselves with a set of sub-prime loans that were now worthless, resulting in record losses for the vast majority of American lenders. On the precipice of the greatest financial collapse since 1929, investors and lenders alike solicited aid from the federal government.

What was proposed by Secretary of the Treasury, Henry Paulson, and the White House to Congress was the Emergency Economic Stabilization Act, which included the $700 billion Trouble Assets Relief Plan (TARP). The intention was to create liquidity for banks and lending institutions to prevent their financial collapse and, in exchange, the financial institutions would eventually pay back the money borrowed from the federal government with interest once the institution became profitable again. Under the Obama Administration, TARP was extended to General Motors and Chrysler, and a separate fund was created to reconstruct Fannie Mae and Freddie Mac.

Though the EESA created stipulations for the restructuring of the financial industry in the United States, this bill, and any bill after the EESA on the federal level failed to establish a plan to help homeowners struggling with their mortgage payments or homeowners facing foreclosure. The bill also did not establish a fund to bail out small businesses that were directly affected by the housing market collapse. Appliance and furniture retailers as well as home construction companies were faced with huge profit losses, and many of these companies were forced to file for bankruptcy or close their doors permanently. Though state and civic governments have attempted to address the issue within their jurisdiction, no federal actions have been taken to help homeowners or local small business. Many of those on main street America felt betrayed by a White House and Congress that was elected to protect their interest, and instead passed legislation to save the multi-billion wall-street banks.

The truth of the matter was just that, the blame should not be placed on the homeowners or the banks, but the federal government that first deregulated the housing market then failed to assist struggling homeowners and businesses. The government traded long-term growth for short-term price hikes, a fateful decision that the American people struggle with today.

0 Using Your Bank as a Mortgage Lender

A mortgage is probably the biggest financial agreement you will ever enter into. For that reason, it is understandable to be concerned with who you end up receiving that massive loan from – not the least because it is, by definition, secured by the building you and your family call home. One major decision budding homeowners face is whether to go with their own bank for their mortgage, or contact a specialty mortgage company who makes home loans the bulk of their business.

Mortgage brokers can be best compared to a local independent insurance agent, or even a supermarket. They maintain relationships with a pool of lenders and usually offer several different “brands” of mortgage with small, but notable, differences.

There are two main benefits of choosing a mortgage broker over a bank: first, because of the range of mortgages they offer and the increased number of lenders they do business with, they can usually find a solution for borrowers with substandard credit or who otherwise find it difficult to borrow. They also have a greater range of options for unusual properties that a standard bank may not choose to deal with. Second, this freedom of lending and the fact that mortgages are their sole focus means that they are often faster to process paperwork, speed up closing times, and can work on your behalf to find the best interest rate available to you.

This service absolutely does come with a cost. Brokers are middlemen by definition, and so will have larger closing fees than going to a lender (such as your personal bank) directly. The brokers are also compensated by the lenders for making the deal. In addition, any given mortgage broker will probably work with a customer once and only once. This leaves no space for relationship building that may otherwise have had a positive impact on the loan and interest rates.

This contrasts strongly with banks. Often, by the time you are seeking a mortgage, you have been with your personal bank for at least a few years, giving them an insight into your cash flows and how you seem to handle money. This is increased even more if you maintain checking, savings, and credit accounts all within that same bank, or have taken advantage of other financing and investing products offered.

If you are responsible with your money, that relationship can make the bank more comfortable giving you improved an improved interest rate on the mortgage. If you have a history of doing extra business with the bank like purchasing CD rates and other instruments, for example, they may give you a break in hopes that you remain a faithful bank customer.

Both mortgage brokers and banks almost always end up selling mortgage loans on the secondary market. For that reason, the language in almost every mortgage is standardized. Notably, this erodes a concern some might have with a mortgage broker leaving the picture as soon as the deal is done: in the end, the borrower works with a lender who has sold the loan no matter what.

The primary difference between any two mortgage contracts will be the interest rate. Considering the size of most mortgage loans, even a tiny difference in the interest rate can reflect a substantial amount of money over the life of the mortgage. For that reason, it should be the number one concern when shopping around for a servicer no matter what.

Rarely, you may find a bank that offers what are known as “portfolio mortgages,” which means they will not be packaged with similar loans and sold off as an investable security. In this scenario, the bank may end up being a better option because they do not have to worry about the marketability of your mortgage loan on the secondary market. A prime example is a borrower just out of college with substantial student loans: the secondary market sees a borrower with a huge amount of debt other than the mortgage, whereas a bank holding the loan for themselves might be more willing to look at the greater picture of financial responsibility the borrower presents.

In the end, the interest rate should still be the driving force behind deciding on a servicer. Tight competition between mortgage brokers might mean you receive a better rate using one, but using a bank might let you take advantage of relationship building and history not considered as strongly with a broker. If the interest rates are identical, stick with a bank.