If You Hate Your Bank Then I Have Bad News For You

I read a lot of other personal finance blogs, as I think getting different voices, opinions and thoughts on various items is great.  I have quite a few (see my blog roll) that I love and others that I read in passing.  One topic I see time and again are posts that tie back to complaints about banks.

Bank of America seems to take the brunt of bloggers ire, but it seems like many banks catch the rancor.  The complaints seem to boil down to a few common themes:

  • High fees
  • Poor customer service
  • Complaints about banks having taken bailout money

If you’ve complained about banks or get fired up about banks, I have bad news for you: You’re wasting your time.

Now, don’t get me wrong, I’m normally a big advocate for complaining when you aren’t getting good service or good value for your money, so it might seem like my advice is being overly dismissive or favoring the banks, but I assure you it’s not.  What it is simple truth.

Here are a few things that the average (or even the above average) person needs to realize about the banks, and I’ll start with the bottom bullet out of the items above and then move to more general terms:

  • The bailout is old news – While it might anger people that banks took bailout money from the government (and if you read the comments of just about any article written about the banking industry in Seeking Alpha, it certainly is), the fact is that the banks have moved on.  While you might be aghast to this day about the audacity of the banks having taken this money, I guarantee that there is not one single meeting being called, one single resource being dedicated, or any amount of money spent at the banks to deal with this issue.  Why? Because it’s in the past.  The banks took the money, most paid it back, and they’ve moved on.  Any and all resources are being dedicated to things that the bank is doing today or plans on doing tomorrow.  They probably cared a lot about the bailouts from 2008 through 2010, but they no longer care, and they never will again.
  • The banks don’t care if you like them – Many people harken to the old days where you had bankers that, if things are to be believed, acted like George Bailey in ‘It’s A Wonderful Life’ where he cared about each person he did business with, and not only cared about them, but made personal sacrifices to ensure that his customers could depend on the bank.  Folks, this doesn’t exist any more.  To expect that is silly.  These are corporations and they are responsible to deliver profits.  Banks get a lot of ire, but the fact is, that any publicly traded company is driven by the same responsibility.  Banks appear more greedy because they deal directly with money, but it’s true of any industry.
  • Most customers do not make banks money – You’ve heard of the 80-20 rule, and in many businesses, there is a variation of this where 80% of the profit is derived from 20% of the customers.  I think this is even more skewed in banking.  The simple truth is that your checking account with an average balance of $1,000 is not adding much to the bottom line, so when they raise your fees, and you threaten to leave, this does not present a problem for the bank.
  • They know it’s harder to leave – Say you’re one of the people that does start looking around and decide that you’re going to leave, banks know that it’s harder to do so than ever.  Before, you could just throw away your checkbook, walk into a bank, and walk out with your money in hand.  Now, you have to change your direct deposit.  If you pay bills from your bank, you have to change all those over.  It’s a harrowing process and banks know that most people don’t want to do it and won’t do it if given a choice.
  • They know it won’t matter – So you’ve decided you’re so mad that you’re going to leave the bank, and you do.  You change your direct deposit, update your bill pay, switch over your bank cards, the whole nine yards.  You sit back, triumphantly having shown the bank that you’re not going to be stuck with their latest fee or have to carry their new required balance.  Want to know how long that’s going to last?  Probably as long as it takes to go to the mailbox and get the notification from your new bank, the one that tells you that they’re implementing the same fees or something similar that will result in the same thing.   Even credit unions, once considered the safe haven from fees, have implemented more stringent requirements that result in many of the same fees, balance requirements or otherwise.

So, is it hopeless?  Are we just supposed to bend over and take it?

No, I would never agree with that.  I don’t think you just roll over and take it, but you can do a few things:

  • Understand your requirements – Many people pay fees because they don’t know they don’t have to.  If your bank starts charging you $8 per month, you might be able to waive that by increasing your balance by a few hundred dollars a month or by implementing direct deposit.  Before just accepting, first make sure you understand.
  • Rely less on banks – The bank where we do most of our banking is primarily a pass-through.  The money gets deposited, bills get paid, and the rest (less enough of a cushion to keep the minimum balance requirement intact) goes elsewhere.  We don’t have a savings account there.  We don’t invest there.  We don’t have our health savings account there.  What he have is basic.
  • Focus your customer service time elsewhere – As I indicated above, unless your name is Mark Cuban (and if Mark Cuban is reading this blog, well how awesome would that be) than the bank really doesn’t care if you complain.  While it might make sense to write on their Facebook wall or Twitter page or something like that, you might realize that your time would be better spent trying to get improved customer service elsewhere.  At a place where, if you left as a customer, it could impact their bottom line.

I don’t think we should take poor customer service from banks, but I think we would be wise to understand the limitations that we have as customers, and how we can best approach the issues that we have to do what we can to mitigate the things that make us see red.

What do you think?  Is it a better use of time to complain about banks or should we minimize the impact and be more pro-active to work around the issues we have, understanding that banks don’t have motivation to make customers ‘happy’?

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How Low Mortgage Rates Will Help Prevent Another Housing Crash

Mortgage rates have been at or near record low levels for quite some time.  Much of this is a byproduct of low rates from the Federal Reserve to the banks, which are able to pass along the low cost of borrowing to their customers.

The hope is that the low rates will encourage more home purchases, allowing for a recovery in the housing market.

The results have been mixed, at least if you look at the news.  Though rates have been low for a few years now, only within the past few months have I seen a lot of news articles proclaiming that there actually is a recovery in the housing market.

I believe that these rates will help the market, but more in a long term way.  This is unusual as most policy these days is only focused on the short term effects.  After all, if the United States government has been kicking the Medicare and Social Security cans down the road for decades now, it pretty much shows that nothing long term is ever in the forefront of anybody’s mind.

Here is how I think the low rates will have a long term effect on housing.

Low Rates (And Prices) Encourage Shorter Term Loans

In the past, it seemed everybody got a 30-year mortgage.  This meant that you spent thirty years paying back the loan.  With higher rates as well as higher home prices, the fact was that the only way many people could afford the monthly payments on a home was to take a 30-year loan.

Now, lower prices combined with lower rates give for more flexibility.  Let’s look at a couple of examples on a Make Believe house.

In 2007, this house might have cost $250,000.  Say you financed all of it (a likely scenario back then), and your rate was 6%.  Your total mortgage payment (principle and interest) would have been $1,498.88.

Fast forward five years.  That home has likely fallen in value.  You could probably get it for $200,000.  On top of that, rates have fallen so much that you could finance that home for 3% if you were to a 15-year note.

If you financed all of that home today with the 15-year mortgage, your principle and interest payment would total $1,381.16.

That means the same home could be paid off in half the time for over $100 less per month.

The Payment Will Come Out Cheaper

On top of that, one of the assumptions I made in my above scenario is likely false.  That being, you would probably not be allowed to finance 100% of the mortgage in today’s lending restrictions.  While that might lock some people out of the market, those who have, say, 10% saved would only need to finance $180,000.

This would take their payment down to $1,243.05 per month, an even greater reduction in your monthly outlay.

How This Saves The Market

While this is all great information and reduces the cost of home ownership (at least from a cash flow perspective), I can see some people scratching their heads on how this will help the market.

The answer is simple.

Equity.

The lower rates and the forced down payments will build equity in homes at a much more rapid rate than ever before.

Let’s go back to the 2007 scenario above.  Considering my example, I effectively said that the housing crash took 20% of the equity from that house.  In order for that homeowner to have remained above water, they would have had to stay above the $200,000 principle balance.  With the factors I outlined above (zero down, 30-year, 6%), it would have taken eleven years and eight months before they would have paid off that 20% in equity.  That’s almost 40% of the term of the mortgage to get to that 20% level.  That is a long time!

Fast forwarding to the other scenario I gave with the $200,000 purchase price and 3% rates on a 15-year mortgage, the homeowner would have to have their balance at or below $160,000 to stay ‘protected’ from going underwater.

For the sake of argument, let’s say the homeowner was able to finance 100%.  Even with that, it would only take three years and eight months to reach the 20% equity stake in their house ($160,000).  That’s a significant difference.  That is an entire eight years sooner to build that equity stake.

It Only Gets Better

But, let’s not forget that the banks, these days, are likely going to require you to put 10% down.  So, that homeowner who puts 10% down, finances the rest at a 15-year 3% rate, is going to find their 20% equity stake arrives at just two years and one month.  That’s nine and a half years sooner than they would have gotten in 2007.

What Does This Mean?

I believe that this benefits homeowners and the housing market in the long term because equity will be built at a much more rapid rate than ever before.  This protects homeowners in the event of a downturn.

When the market took a 20% downturn a few years ago, most homeowners who had bought in the last few years were instantly wiped out.  If it takes eleven years to get to 20%, think about how little equity there was for someone who had just moved in.  This instantly created devastation in the market.

Imagine if another downturn took place in the next five years.  Guess what will happen?  Well, to anybody who bought their home, put 10% down and financed to a 15-year 3% mortgage, the answer is: Not much.  Because they would still have positive equity in their home.

This would mean less people would walk away.  Less foreclosures.  Less short sales.  Less banks taking over street after street.   Less disrepair taking over neighborhoods.

And It Only Gets Better

It’s sort of a positive catch-22, because more equity would protect us in the event of a housing crash, but I believe the equity will also prevent a future housing crash.  So, what will happen is prices will actually start rising again.  And, what will happen after that is that people who are sitting on the sidelines will suddenly realize that the real estate market is on solid ground and will get back in the game.  This will push prices up further.  If rates stay low, this will mean more equity will be created in the housing market, providing it additional stability for years to come.

The housing market got very leveraged and this caused an artificial rise in prices, which led to the crash.  I believe now that the market is getting deleveraged, this will also create a rise in prices.  The difference being, the rise will be one built on solid ground.

I’d love to hear your thoughts. 

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Turns Out Our Bank Was Not Being Completely Up Front

Recently I wrote about how our bank (Fifth Third) charged us for what appeared to be inactivity.  I was surprised by this.

Unfortunately, it turns out it wasn’t completely true.

To summarize the previous post, I had two $5 service fees show up on our savings account, which truthfully, we don’t use.  I was told that it was because we hadn’t made any transactions in twelve months.  All that was needed, I was told, was to make sure to make at least one transaction in a twelve month period.  They waived the fees, I transferred a little money, and I thought all was well.

Except I got hit with another fee.

I inquired about why, asked them to once again reverse the fee, and waited for a response.  It was not quite the response I was looking for.  First, they would not waive the fee after having done so in the past.  Second, they said that in addition to needing activity, the minimum average balance had to be at least $500.

At the time, it was around $250.  When I asked why this was not provided to me originally, they apologized (still saying they wouldn’t reverse the fee), and gave me all of the requirements that were needed.

I am more than a little angry and disappointed, because I felt that this element should have been provided to me up front.  I’m likely not going to close all of our accounts, but I’m also not going to go out of my way to recommend Fifth Third to anybody I know.  They’ve taken a step back from ‘A company I really enjoyed doing business with’ and are now thought of more along the lines of ‘A company that is no better or worse than their competitors.’

For the record, we will not be meeting the $500 requirement.  So, before our next statement cycle, one of us will be going in to close the Savings account, leaving just our checking account.

Too bad, because I thought Fifth Third was really above all the silly and petty fees that seem to be the norm, but I guess they really weren’t above it after all.

For now, our checking does remain free and so they’ll keep that business, but if they go after that with any fees, I guarantee we’ll be done as Fifth Third customers.  Fair warning.

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