Answers to financial questions

William Martin, chief executive officer and vice chairman of Service1st Bank, has agreed to answer some readers' questions about the ongoing financial crisis and what it means for individuals.

Martin is probably Southern Nevada's best known banker because of the numerous television commercials he appeared in while serving as chief executive officer of Nevada State Bank. He worked 20 years with the Office of the Comptroller of the Currency, the federal agency that regulates national banks, and served as deputy comptroller for multinational banking for five years.

Martin was chief executive officer of Nevada National Bank for six years until the bank was acquired in 1989. He joined Pioneer Citizens Bank the same year and served as chief executive officer until Zions Bancorporation of Salt Lake City acquired Pioneer Citizens in 1999.

Martin served as chairman and chief executive officer of Zions' Nevada State Bank until 2007.

I am upside down in my house with a seven-year arm that is due next year or at its final year. I would like to refinance into a 30-year mortgage but my bank says they can't do it cause it is worth less than I owe. What do I do and who can help?

Martin: This may sound like a lecture, but we all accepted the ARM loan rather than fixed-rate loans because we were enticed by the lower rates, and over the past seven years we've saved a lot of money on the lower payments vs. the 30-year fixed rate that was available at that time. We took an interest rate bet and for reasons we never contemplated, we can't now exit the ARM into a fixed-rate loan. We lost the bet and now we're at the mercy of the ARM terms.

Your situation is not unique, but there's some good news - being a seven-year ARM, six years ago you qualified under standard lending terms rather than the obscene subprime "qualifications." You will soon be into the "rate adjustment" period and I think you'll find that your rate won't go up dramatically like the subprime loans have and will. First, if you haven't done so already, check your loan documents to determine your index and calculate your interest rate - I have a five-year ARM that came up three months ago and my rate dropped percent to under 5 percent. Prior to the maturity of the ARM my lender (IndyMac) offered me a fixed-rate 30-year "rollover" loan and the APR was still in the high-5's.

But be prepared, you sound like a good borrower who is not under any financial distress so they may just ask you to stay with the original terms. Wait until you're closer to the maturity and watch for an offer from your present lender, if not, call them. You're a good borrower, they do want to keep you. Good luck.

Since the federal government intends to swamp our money supply with new spending to rescue the economy, I am concerned about the prospects of too much money chasing too few goods and services, otherwise known as inflation. How does a conservative investor best protect oneself in this enviroment, especially when one observes that we have been experiencing a prolonged period of negative real interest rates of late (i.e. current interest rate adjusted for annual CPI increase)?

Martin: Your concern is well founded. Liquefying the system can restore economic vitality, but too much money and inflation is a likely result.

Watch for published opinions by experts on inflation prospects to help your decision process.

I am totally and completely unqualified to make any investment recommendation, that's for a qualified investment adviser. But you having two exclusive goals of being conservative in investments and outpacing inflation with income is not always possible, which you know.

The current flight to quality had some shorter term U.S. Treasury obligation rates down to almost to zero percent, today's three month T-Bill yields .02 percent, the one year is slightly over percent, meaning, that choice is conservative and safe, but the returns are low and are definitely not inflation protection at this point. Some banks advertise certificate of deposit rates up to 4 percent and even higher and this should exceed CPI rates in the near term. The 30 year Treasury bond yields only 3 percent today.

The CDs represent short-term maturities so you'll have liquid funds available when you see other opportunities arise, and they will. To be even more conservative, don't exceed FDIC limits, which until Dec. 31, 2009, stand at $250,000 for interest bearing deposits, per depositor, e.g., husband and wife, $500,000. Find a good investment adviser and discuss your concerns and obtain his/her advice for a hedge against inflation.

The banks have created incentives to not pay your mortgage. Many people have struggled to keep current on mortgage payments, and are on the brink of defaulting. So they do the responsible thing: contact their lender to ask about a loan modification. The standard answer from most banks is, "As long you're paying your mortgage, we can't help you."

Martin: I realize your question was really a statement, and what you say certainly contains a great deal of truth, I hear the same thing. I'm told many lenders require loans to be 90 days delinquent before a discussion of relief can be provided BUT I'm now also hearing more and more about lenders visiting with borrowers who are current on their loans but stretched to the limit and negotiating modified terms before reaching the borrowers' crisis level and default. The lenders recognize that a reduction of the interest rate on a loan is preferable to foreclosing on a house and trying to sell it; that will be an incentive on their part to provide some relief.

Some bankers have gone so far as to tell the homeowners to quit paying their mortgage, so that something can be worked on. This is so backward! Responsible people who have cut way back on their normal spending so they can keep paying their bank are being punished, while others who refuse to change their spending habits (e.g. quit making mortgage payments so they can buy that big-screen TV for Christmas), are being rewarded with reworked mortgages - lower rates, reduced principal, forebearances, etc.

What can be done about this situation?

Martin: Short answer, nothing can be done. There is anger among many who have been responsible in their obligations and now see less responsible borrowers reap a benefit from that behavior. I'm guessing there are millions of home mortgages and the approaches to problem resolution will differ greatly from one lender to the next; some solutions will be "more fair" than others. We focus on the situations of the borrowers, but the lenders likely also have a "situation" of their own and that will contribute greatly to their approach in dealing with troubled loans, i.e., they want their good borrowers to continue to pay and their weak borrowers to start paying, which can lead to assisting the latter group in some manner..

Lenders don't want the houses back. There has been a general attitude prevailing that in all cases those individuals who are struggling have been irresponsible with their finances when in fact many are just victims of the economy, e.g., reduced income from investments or loss of a job.We should remain sensitive to those who deserve some consideration because they want to do what is right, in particular, remain in their homes knowing they are worth less than the loan. I sure like those people a whole lot better than the thousands who have just simply walked from their obligation.

Of course, there are always those who will game the system to their best advantage while others struggle to keep true to promises made. Don't let it bother you if possible.

I am within a few years of hoping to retire. I made a big mistake in my investment in 1st Trust Deeds (USA Capital) that ended up in bankruptcy and I am not sure what, if any, of that money I will get back.

Martin: This is not intended as a lecture, quite simply because I too made 1st Trust Deed investments. There always has been and always will be a relationship between risk and return. Because of the accelerating real estate values we all thought we were protected and free of risk.

After all, we rationalized that we're surrounded by mountains restricting expansion as well as most of our land in Southern Nevada is in the hands of the U.S. government which may or may not release it. Land values in other land-locked areas such as San Francisco or New York are very high. We have the strongest job growth in the nation and all those people have to live somewhere, and so on and so forth. Now we are learning the consequences of that risk - there is no such thing as a sure thing. Regarding your second component, know with whom you are doing business.

I have used a money market account with G.E. called G.E. Interest Plus that has always been a better rate of return than banks or stock broker's accounts. It is currently paying 3.51 percent and allows me to write checks out of the account. I have about $150,000 in that account, which is the majority of my cash available. The rest of my retirement is tied up in retirement mutual funds, which have been hit fairly hard.

Should I get my money out of the G.E.Interest Plus account and take a more conservative position by putting it in an FDIC insured account?

Martin: I have no knowledge whatsoever about the G.E. product or whether it might be FDIC insured. Assuming no FDIC coverage as you indicate, you could conduct your own Internet research to learn of the account's workings, find if they have issued disclosure documents or quarterly reports that detail their permitted investments and holdings. Determine if their use of your money meets your expectations or represents greater risk than you want to assume.

If it turns out you would feel better with FDIC coverage, one solution might be to seek a bank money market checking account (MMDA) that pays interest. It is still a federally regulated product so you are severely limited on the number of checks that can be written monthly, but, with some restrictions, you can make unlimited transfers to a checking account from which you could pay bills. Interest rates are usually tiered based upon balances but you can currently expect about 2.5 percent on an MMDA for that size of account, and it would be fully insured.

How much riskier are accounts in banks or credit unions insured to $250K with private insurers (American Share Insurance) rather than the FDIC or NCUA?

Martin: I daren't comment on the strength or viability of any insurer other than the FDIC, most especially a private one, and FDIC I can tell you always has and always will be there, period. It was created in the 1930s to restore consumer confidence in financial institutions and that's still true.

Credit unions pay no taxes, such as income taxes, sales taxes, hotel taxes (they don't like it but they brag that paying their share of employee FICA counts) and while that tax exemption might have made sense in the 1930s, there is no reason why they should receive that subsidy today. They lobby heavily to protect that tax exempt status, can't blame them for that, wouldn't you if you didn't pay any taxes and your competitor across the street did? Congress never intended that there be two financial services systems - one that pays taxes and one that doesn't.

Does it make sense to contribute to money market accounts currently? Ostensibly you are still buying shares, and at a lower rate than normal. So with the thought in mind that those shares will increase in value (eventually), does it make sense to contribute where the account is not retaining any of its actual monetary value?

Martin: I am going to assume that when you said money market accounts you really meant mutual funds which invest in stocks. Making a choice to invest in stock funds right now, yes, you're right, your "average cost per share" will decline as you purchase shares at today's depressed prices and will result in an improved a profit margin to you "eventually" when stocks go back up.

One thing is true - in bad times such as these there are always great opportunities. The trick is figuring out where those opportunities lie ... and when to take advantage of them. Sorry, I can't begin to make a recommendation on when to invest, or in what to invest. You need an investment professional for that advice.

I am an early retiree who thought I planned correctly with a diversity of stocks, CDs and real estate. I am struggling with two issues, one emotional, and one more pragmatic. First, I have difficulty getting over the fact that I worked nearly 40 years and stayed in the market, thinking that would yield benefits and keep up with inflation. My plan was to begin drawing down from my most conservative 401(k) this year, and leave the remainder for another 10 years. In two weeks, I lost all my gains, plus about 1/4 of my principle. Like many others, I am heartsick that I thought I planned and saved, and now a significant portion is gone.

Secondly, I am unsure whether to shift what remains into more conservative vehicles, in order to shield from further losses, or to wait out this market to see if some sort of rebound will allow me to re-coup some of my losses? In the interim, I am (shudder) going back to work, figuring that the only way to protect what remains in the accounts is to avoid spending it for a couple of years.

Martin: I'm sorry, and I know there's little comfort in knowing what good company you have, we have all realized such losses and are staggering from them. We all made choices, sometimes independently and sometimes under the advice of commissioned professionals, but the result seems to be the same, the value of our investments have declined significantly. It's very sad.

You know I'm going to avoid any recommendations on maintaining or changing your current investment mix, I'm not a qualified investment adviser. But you do have it nailed - if you have the luxury of working for a few years and not having to draw on or sell your currently depressed invested funds to cover living expenses, you have a totally viable solution and can likely ride out the current market. Your new loss will be your low handicap you've been working on.

As a possible first step, would it make sense to reduce all fixed and variable mortgage interest rates to 3 or 4 percent for the next five years. Then reset the rate annually based on market conditions. Maybe even offer the lender participation in the potential appreciation of the home. This should help stop foreclosures, the downward pressure on home prices, and provide the necessary confidence and capital to stimulate the economy.

Martin: I had three hours of econ in college and I'm not afraid to use it. If you are asking whether the macro result of reducing all mortgage interest rates to 3 or 4 percent and holding them at that level for five years would have a stimulus benefit, I'd say "of course," and in a big way. That scheme would reduce monthly payments on probably millions of loans by hundreds or thousands of dollars per month on each mortgage and that in turn would create huge "spendable" or "discretionary" funds available to purchase things, resulting in a giant economic resurgence.

Now, on the practical side, how you convince lenders to go along with such a plan, and the losses they would incur, might be just a l-i-t-t-l-e bit trickier. For sake of argument, if you owned those mortgages and were dependent upon them for your income and they had a yield to you of 6 percent, would you now be willing to see your income cut in half by being reduced to 3 percent? How would you feel if the government made you do it?

I am a homeowner with Countrywide/BofA in Las Vegas. I've kept my mortgage current and did not refinance it to an excessive amount.

However, because the market is now so bad in Vegas, I now owe more on my house than I could possibly get on a sale. Is the so-called bailout for Countrywide or any other mortgage company going to do anything to help those of us who've managed to stay current on payments but are "underwater?"

Martin: In my 40+ years of banking I've see a number of bursts of "real estate bubbles" in which buyers found themselves underwater with respect to amounts owed vs. the value of their homes. In those cases there was no government bailout. People, for the most part just continued to pay (if they could) and values came back up as demand exceeded supply.

From what I see and hear, there are a lot of people very angry that their house is now worth less than the amount owed. They have jobs, make their mortgage payments, but want some relief in the form of a reduced loan. I think an awful lot depends upon whether you bought your house to be a home, where you expected to live and maintain your family - remember "a man's home is his castle" - that was the American dream in fact, or whether you bought it as an investment with the idea you'd sell in a few years and reap a huge profit? Because if it's your home, then live there, pay the mortgage, you only have a paper loss; what's going on in the real estate market has nothing to do with you.

To complicate things, if through some mandate the amount you owed was reduced, you stayed in the house for a number of years, its value went up, you decide to sell and there is a nice profit, even beyond what you originally paid for the home, would you give some of that back to the lender that forgave a portion of your loan? Said another way, are you in for the short term or the long term?

This may be a silly question but has the government even considered just paying off everybody's debt with the bailout money, rather than give it to groups like AIG (who apparently cannot manage the money at all). The impact of paying off everybody's debt would be to instantly free up personal capital and cause an instant infusion into every market in the U.S. Just a thought.

Martin: Ahhhh, a nation of citizens without debt - doesn't hardly sound American to me. I shouldn't worry I guess, I'm confident they'd all go out and get buried in debt again. Of course it would cost trillions, TRILLIONS, which doesn't seem to be a problem in Washington. It would put the bankruptcy lawyers and all those phony "we can solve ALL your debt problems, including the IRS, just call" companies completely out of business and ... saaaay, you may have something there.

Write your congressman or congresswoman.

With large companies like Las Vegas Sands Corp. going bankrupt, how bad does it look for an individual to go bankrupt in this economy? I am considering my options and this seems like the last resort.

Is it better to go bankrupt in this economy than previous times? How bad will it hurt my credit? Or, will most creditors/future ventures be more forgiving?

Martin: I'm a little long of tooth. Certainly as I grew up and entered banking there was great stigma attached to personal bankruptcy and people went to great lengths to avoid it. Even handshake deals were kept. It can certainly be argued that this time is different - there are lots of victims who didn't participate in the speculative purchase of real estate, didn't over-encumber themselves through multiple re-finances of their property and then spent the cash on personal items, who didn't obtain a loan under a less than truthful application, who didn't accumulate large debts on credit cards and household purchases, who now find themselves without employment or reduced income and are in danger of not meeting their obligations.

In those cases, the U.S. Bankruptcy Code was designed for such people to obtain a fresh start. If the burden is too heavy for you it can affect your relationships, attitude and even your health. It is a very personal, and sometimes painful, decision. If you are that buried with little prospect of pulling yourself out, then perhaps you should accept the consequences of such a decision, at least it will lift the burden that you live with daily.

TV bankruptcy lawyers promise the panacea of having a debt-free life, yes, they're there to help ... for a fee.

But as you ask, yes, there is another price to be paid. Your credit will be severely impacted, make no mistake about that. It will all remain recorded on credit reports for seven years making good credit unavailable to you and causing you to pay more in interest rates assuming someone will lend you money after a few years. It is a black mark any way you cut it.

There always has been some leeway by lenders in evaluating the circumstances of a bankruptcy (e.g., medical), but the general view of a bankrupt is someone who didn't manage their finances properly, couldn't pay and may well not be relied upon to do differently in the future.

My concerns are with my son's financial situation. He bought a home in the high priced area. I understand the government is trying to bail out those that are having problems with their payments. He, however, has kept making his payments on his home that is not worth his loan. My question: Should he quit making payments in order to get the bailout help from the government? It seems to me that the government is only willing to help those that are not making payments and not those that are trying to do the right thing and keep making payments. He can not sell his house for what his loan amount is. He might be able to rent it, if the payments were lower. Please give suggestions.

I understand from another person's financial situation that the government is willing to help them get another home at a discounted interest rate of 4%, even though in the past this person has claimed bankruptcy, then was allowed to buy a home afterwards. Then the same person foreclosed on their home. Why is this person allowed to get this kind of help from the government consistently? Plus, this person makes more salary than most that are NOT getting this help. It seems to me, my son should quit making payments in order to get bailed out - don't you HONESTLY agree?

Martin: Honestly? You want me to give an HONEST answer? Well, OK, if you insist.

If I understand, your son has a job and is enjoying success, enough so that he sought and received a mortgage on a very nice home, hasn't lost his job, has no financial pressures and life is good.

Now the real estate market has turned sour, his house is worth less than his mortgage, he's continuing to pay but you, as his parent, are advising that he's been dealt a bad hand and should just walk from his obligation. What a wonderful example you set. You don't tell us whether he bought the house as a home for his family or just thought of it as an investment to sell in a couple of years at a great profit?

Once upon a time Americans just aspired for home ownership as a quality of life matter, first time home buyers are usually fulfilling a dream. Through FHA and some other government mechanisms (e.g., deduction of mortgage interest on tax returns) home ownership was placed within reach of virtually all those who were willing to work and save for it and that was the goal. Indeed, a man's home was his castle. You didn't worry about what the neighbor's house sold for and whether you were "under water," it was your home.

If your son has income and assets then you should also advise him that walking from the mortgage may result in the lender suing him for a deficiency balance and his credit reputation will be lost and rightfully so. You're telling him to be a quitter and let someone else take the loss for his decision. He was sure happy when values were going up, he calculated his paper profit regularly, but now the picture isn't so pretty and you advise bailing out. For the sake of argument, given the same circumstance, what if YOU personally had lent someone the money to buy a house, then how would you advise? It matters whose ox is being gored. There's a financial decision and also an ethical one and he has his choice. We know what yours is.

Hope this was honest enough. Five cents please.

My husband and I came to Las Vegas four years ago and bought a $350,000 house three years ago. We bought high and our neighborhood has turned iffy with rentals and foreclosures. We have another home in Arizona that is rented and will be our retirement home in five years. We plan to have that home paid for.

I am a teacher who will not benefit from the Nevada retirement system unless some changes are made because I have paid too much into Social Security to make the choice of either/or. What I am paying in is lost at this point.

My husband participates in his employers' 401K at 8 percent of his pay, down from 28 percent several months ago. Along with every one else, that portfolio is down at least 30 percent. We both have small pensions we currently collect, totaling about $2,000. Both of our jobs are very secure, at least comparared to others.

We talked recently of walking away from this mortgage obligation. We borrowed $30,000 from his 401K for the down payment, we pay PMI with little hope of ever having 80 percent equity to save that $200 a month, and our payment is $2,000 a month. We could downsize to a rental and save at least $500 a month plus save on utilities.

We are very responsible but feel we are losing on this investment and it will hold us back from retiring in five years because we will not recoup or maybe be able to sell. Our current credit rating is 810 and we don't see making any purchases in the next five years. One vehicle will be paid for in June and the other in two years. We have never been in over our heads before, have worked for the last 40 years, raised a family, served in the military and taken care of our obligations. We make our payments and are able, but we are one disaster away from not.

Is it foolish to think we are throwing $2,000 + a month into a losing proposition? We contacted our bank about the PMI but were offered no solution. What are the consequences of this desperate action we are contemplating and why shouldn't we jump in on the irresponsibilty wagon?

Martin: You tell a story of lives of hard work, responsibility, good planning and pride. If you want me to tell you that you've presented a compelling story that justifies anger and frustration, you have. Of little comfort I'm sure, you are not alone, you're joined by millions. If you believe that it is totally in your best financial interest to walk from your obligations, that's your decision. People are doing it every day, but it doesn't make it right.

As I've told others, there have been real estate bubbles burst in the past and there wasn't this "gee, I'm a victim, I'm going to walk" mentality there is today. I often ask people whether they bought their house as a home or as a short-term investment. Sounds like you really viewed it as an investment, you anticipated a nice profit in a few years which could eliminate the debt on your Arizona retirement home and that meant more financial security for your future. Said another way, whether you viewed it this way or not, this purchase was a speculative move. You had the same market expectation as all other home buyers, and investors. Alas, the impossible happened.

I understand being mad - sometimes bad things happen to nice people. Use your best judgment, but something tells me you can't change all those years of responsible behavior in return for the $500 a month. You've shown dignity and reliability, you won't sell it now.

As a piece of practical advice, you both have secure jobs, you've accumulated assets, you've planned well for your future, you've built an incredible credit rating and through no fault of your own, the wheels have come off. Because of your financial situation, should you cease payments, your lender may well foreclose and sue you for the deficiency balance. The loss will no longer be a paper loss to you nor one you escaped.

Why hasn't the government taken a look at buying the bank's REO inventory instead of the toxic loans? They are a much better investment for the government, especially since they can be picked up for less than replacement cost.

Isn't the whole idea to stop price declines which are causing normally ordinary homeowners to walk away from their homes?

by balancing supply and demand, by taking REOs off the market for the time being, and controlling the release of REO inventory to stabilize prices?

Martin: Clearly if the government purchased all foreclosed houses and kept them off the market, demand would eliminate the supply of homes at a faster pace. I am so unqualified to suggest from a macro basis what might be the course of action that best spends lots of money to bring this awful nightmare to an end, or even reduce the pain.

Every proposed plan has had both benefits and flaws. Your plan would certainly make bankers pretty happy by removing non-earning assets from their books but I'm not sure how far reaching that would be in terms of the magnitude of the impact on the real estate markets and the economy itself. I think they, the government, wants to spend the money in a manner that will have the greatest benefit to the economy. For example, within the last few days they have announced the proposed purchase of mortgage backed securities from Fannie and Freddie by the government and have predicted that if this occurs, permanent mortgage rates could drop to under 5 percent. I have to believe that would be a great stimulus for buyers to enter the market.