Father Sez

From and to parents - parental advice to our children on personal financial management and life.
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Archive for the ‘Debt’ Category

What I have learned about the morals or the honour of borrowing

Wednesday, March 11th, 2009

My very first experience with “debt” was when my eldest brother helped me take a study loan to fund my University studies. I cannot remember the details of how we went about this, though my signature must have been required every step of the way. I suppose my brother must have wondered how on earth I would ever make it in life, much like I now wonder sometimes about my children…..hehe. 

When I graduated and started working, my brother would every month, without fail and like clockwork, take a bus, go to the office of the lending agency and pay the instalment. This was for a period of two years (tertiary education in Malaysia those days was cheap!) I can still remember him mentioning that almost all the staff there knew him because he was amongst the few (very few??) paying regularly. 

The point is, not paying or postponing an instalment never ever entered our minds. This mindset was something that somehow my parents had hammered into us from very young. 

I started working and my third job was with one fairly large group which was mired in debt. And one of my job functions was the so called restructuring of debt. You know, the normal formula, sell some assets, pay down some debt, conversion of bonds into equity, seek new repayment schedules on the other loans so that they could be met etc. 

One of my perks when I joined the company was a housing loan. The company took over a housing loan that I had with my previous employers. This was also during a period when our country was going through a tough time and basically my loan was under water. 

I got into the job with real gusto and soon realised that not everyone had the same mindset on the obligations taking on debt entailed. I was introduced into the world of using legal methods of holding creditors at bay and just dragging them along. And, boy, you could hold them off for quite a number of years. 

Then another transaction which the company had entered into about 3 months before I had joined exploded. In my view that transaction had been done to sort of screw some of the creditors but unfortunately the counter party screwed the company instead. Another legal front opened, alongside the many we already had with banks and other creditors.

As one can imagine, this “culture” clashed violently with all that I that held dear. I lasted about 5 months at that job. I left with a very sour taste in my mouth and a deep dislike for that company and its senior management. 

When I left, I was requested to repay the housing loan. As the loan was underwater, no way I could have refinanced the loan. But unfortunately for them the mortgage documents had gone missing! With God as my witness, I was never the custodian of the documents and I had nothing to do with their disappearance.

But I flatly refused to do anything to legitimise the loss and as a result they could do nothing. I just stayed in the house for 2 years without paying rental or loan instalments.  

About two years later, a new management took over that company. A representative came to see me to negotiate on the loan settlement. It took him about a minute to get me to agree to pay! All he did was to ask me, “Did I take the loan?” My answer was “Yes”. Then he replied “Then you must repay”. End of discussion.

It helped that this guy was a person I respected and he had nothing to do with the shady characters of the past management.  Still I could have just ignored him and this unfairly favourable state of affairs could have gone on for quite a while longer. I suppose they would need a court order to compel me to sign the documents allowing them to obtain a replacement copy of the title. And I had learned quite a bit about legal kung fu in my 5 months with them to delay this by another year or so. 

But in the end, what my parents had hammered into me prevailed, and I refinaced and repaid the loan.  

These events, which happened almost 2 decades ago, went through my mind when I read Brip Blap’s “Produce the Note”, and in particular this sentence…… We throw any concept of honor (i.e. paying one’s debts) out the window due to legalese, of course.  

Well, I am happy that I climbed out of the window and picked back my concept of honour. Though it was two years later!


Housebuyers in Malaysia are bound hand and foot when they take a mortgage

Monday, March 2nd, 2009

A lot is being written in the US blogs about people walking a way from their upside down mortgages. The latest that I read on this was Flexo’s “Should you walk away from your house and mortgage?”  

I know nothing about the legal obligations of the borrower under a US mortgage, but it seems that all that is affected is our credit rating. Maybe demolished completely even, but that seems to be it.  

The Malaysian situation is so much different. A borrower basically signs his / her financial life away. The borrower is made to pay one way or the other, whether, 

-         He passes away. Then his estate is liable for the debt. Usually the banks get a mortgage policy at the time of issuance of the loan. So the loan is paid off.  

-         If the mortgage is for a house under construction and the developer goes belly up, the borrower pays even though there is no completed house for him. This has been a serious problem in the past. There has been a lot of talk on the developers having to build and sell. I am not sure if this has been put into effect. 

-         He loses his job and is unable to pay. Too bad. He just has to find the means or will be dragged through the bankruptcy courts. 

Now, we have always looked at the US as a developed nation and something that we should emulate. Wonder if the Malaysian Banks (including American banks in Malaysia like Citibank) will ever change their standard housing loan documents to match what seem to be US standards?  

Yet another reason why it pays to be financially literate

Wednesday, November 19th, 2008

dy/dx Ben was the nick name given to a good friend Ben from my campus days. Ben was an Arts or Economics student, I think. (He is now a proud holder of a Masters Degree in Law). I still remember vividly Ben telling us about some exam he had sat for, where his brains just fried, emitted smoke and froze when he saw questions like x + 3x – 4 x = ?  

I think that was when I first realised that not all of us are wired the same way. Having attended Science stream in school, questions like these would have been no problem for me or any of my classmates.  

Apparently it was not the same for those of us from non numerate backgrounds.  

This fact struck home again a few weeks ago. 

I saw an advertisement in the local papers about a 3 hour seminar designed to teach us the secrets of tremendously reducing the interest we pay on our mortgages and at the same time shortening the time.  

The first thing that came to my mind was that these guys will probably tell us to pay over and above the minimum payment which would reduce the interest and the period of the loan.  Still my curiosity got the better of me and I signed up. The amount to be paid was very small and I thought the coffee break and the cookies that went with it would cover the cost anyway. 

There were almost 50 of us that day, all eager to find out about this secret. As expected the presenter showed some fancy charts, and finally came to the point that additional payments would reduce the interest and the period. He then struck some uncertainty in us by saying that since most of us would not have read the loan agreements in detail, just making the payment was not enough. And his company offered the service (for a small fee) of analysing the loan agreement and to ensure that the additional payments were properly allocated by the Bank. 

Then came the invitation for people to sign up, and many of the attendees did. 

I wondered as to why we could not read the loan agreements ourselves and settle this. Why should we need to pay for these services?  

The answer is that not all of us are wired the same way. 

Some would have figured this MR trick all by themselves. Others would need some prodding, and then they would be able to figure it out. And yet others would remain baffled despite the prodding and would need someone to sort it for them. 

I think this is yet another reason for us to be financially literate. And those of us from non financial educational backgrounds should for our own good, make a strong effort to get ourselves a little educated financially.    

We have sold the house

Sunday, April 13th, 2008

This journey, leading to the signing of the S & P last Friday, started shortly after my wife and I studied the first ever family budget that we had done. Not good! 

Then we did a review of the family loans and applied the DTI ratio that I read about in Moolanomy. (The Digerati Life has also written about this. Both are very useful pieces of information for would-be borrowers and others like me, who may never have run a health check on our loans.)  The results of the loan review were, needless to say, not good, and this was the final straw that led to my wife and me deciding to put up the house for sale.  

(We bought this house quite sometime ago. About ten years ago, we shifted and this house has been rented out since then.) 

I have read that some bloggers, like Brooke would prefer to handle the sale themselves. We appointed an agent and are very happy with her efforts. Still, I must mention that there was hardly any interest, until I followed FMF’s sound advice on not making the single biggest mistake of home sellers  

I have now signed the S & P agreement, and the buyer has paid the 10% deposit. There are still a few formalities to be settled before the property actually changes hands, and we receive the rest of the money.  

My wife and I have agreed that the proceeds, after paying the costs of the sale will be used primarily for debt reduction. Our loan profile “before” and “after” our planned debt settlement will be as shown below.  

All figures in %

 Before  After
 Overdraft             7.00               -  
 Car Loans           60.00               33.00
 Mortgages           33.00               67.00
 Total         100.00             100.00

Some amounts are being set aside now for family expenses expected to arise over the next couple of years. (This was at the reminder of my wife and I think it is lucky that I did not overlook this.) 

At the time of the loan review, we figured our “after sale” DTI (Back ratio) to be 7.40%. The present estimates (after debt reduction and amounts set aside) are at 11.80%, still a fairly respectable rate, I think.  

The sale also marks another milestone of my plan to quit the rat race 

Selling the house was not that simple a decision to make, despite the fact that we had not been living there for almost 10 years. The house is in the capital city (we now live in a slightly more rural setting, about 60 km away from the capital), and there were thoughts about shifting back to the capital someday.  

Even after making the decision to sell, signing the S & P was another toughie. There are emotional ties to the house.

I’ll write more about this tomorrow.  


A critical review of my loans

Wednesday, February 6th, 2008

Though I keep track of my loan balances in my year end net worth computations, I have never really sliced and diced them to look at them from different perspectives.

Today I did just that.

The breakdown of my loans (by percentages) is as follows:

         2005      2006      2007
Investment Loans      26.00      14.00           -  
Overdraft           -          6.00        7.00
Car Loans      14.00      25.00      33.00
Mortgages      60.00      55.00      60.00
Total     100.00     100.00     100.00
Loan increase     100.00      58.65     (16.95)
Months left on minimum payments: 90
Months left on present payments: 76

This is not good. The number of months left assumes that I’ll have the same earning power over the next 6 years or so may not be realistic. Though I have a couple of irons in the fire, they are still a little long shots at the moment.

More confirmation that my debt levels are not good is shown when I apply Moolanomy’s DTI ratio calculation.

The present payment is a whopping 39% of gross income.

My wife and I have decided to put up on our houses for sale. The rental returns we are getting is far inferior to the savings that we’ll make if the sales proceeds were to be applied to loan settlement. (We are lucky to have a truly wonderful and responsible family as tenants, so at least there have been zero headaches. My wife and I are also probably rated by them as great landlords as we have maintained the same rent for the past 6 years.)

If the property were to be sold and the net proceeds used to repay loans, our loan profile will change as follows :

Loans become: As % of 2007 total 29.39
Months left if I continue present payment: 23

The DTI now becomes a much more manageable 7.40%.

This will lessen the financial pressure for me as I yearn for a much better life / work balance.

We put up the house for sale about a couple of months ago. Perhaps we are making what “FMF calls the No: 1 reason why houses are not being sold” mistake.

My wife tells me that her instinct is that we would not sell the house and something else would happen that would change our financial plans for the better.

I don’t know. This is something that I also have to discuss with my two elder girls. The house has many good memories. This was our first home, all the houses before were rented. (The 3 younger kids were also born here).

What do you think? Am I doing the right thing? Your advice and views will be most appreciated.

What’s worse than being a borrower?

Wednesday, December 19th, 2007

Simple, being a loan guarantor! 

A guarantee ties the guarantor with all the obligations the borrower has in respect of the loan the borrower has taken, but none of the “benefits”. 

Or in other words, a guarantor is a borrower who never got the money. 

Banks in their well funded quest to make sure that no loan given out is left uncollected, very often insist on another party, (other than the borrower) to guarantee the loan. Hence if the borrower defaults, the guarantor pays. 

The main rule is “Never sign a guarantee”. 

The Malaysian Insolvency Department seems to agree. In fact, this is what they are openly announcing. 

Can we live with this rule?  

Banks, at least many in my country anyway, insist on a guarantor, even if the borrower meets all requirements. They just want to play safe. And the loan documents would say (in fine print, of course) that it is up to the Bank to choose who they want to go after, in the event of default. 

Organisations which give study loans, also insist on guarantors. In fact, they usually ask for two, and disqualify the parents. 

My wife has had a bad experience. A “friend” got her to sign a study loan guarantee, during my wife’s younger and much more ignorant days. (Now she’s young but not so ignorant.) The lender made a claim on my wife, claiming they could not find this dead beat borrower.  

The trouble my wife went through to track this bum of a “friend” down and get herself out of this jam has taught her a good lesson. 

But there are plenty of others out there, either nursing bad financial wounds or ending up as financial ICU cases themselves because of guarantees they had signed. 

Can we always say no? I don’t think so.  

We think, evaluate and weigh carefully many choices that we make in our lives. Just like that we have to weigh carefully the signing of guarantees. 

These are the rules we have set in our family. 

1st – Follow the Main rule for all except family  

2nd – For family, what is the purpose of the loan? 

3rd – Has the borrower demonstrated, what we feel is adequate pf knowledge and discipline for us to believe that we will not be “called on” to pay the guarantee. 

4th – What is the downside? Can we live with it should the worse case scenario play out? 

My history on guarantees so far are :- 

a) I gave an indemnity on a scholarship secured by my nephew, who did medical studies in a local university. He had to pay a certain sum, should he not serve the Government for a certain number of years after graduating. He is nearing the end of his “bond”.  

b) I signed as a guarantor for my cousin who took a housing loan. This was well before the setting up of all the above rules. I am happy to say that he has paid back the loan and bought another 3 units since then. 

Both the above turned out well.  

On the receiving side, two of my wife’s uncles have signed a guarantee for my second girl’s study loan. I strongly suspect that they did not evaluate this issue as carefully as I might have. Or perhaps they do have high regards for my family’s fiscal discipline.

I am indeed most grateful to them, as without meeting this condition, my daughter would not have obtained the loan.  

I don’t often receive requests to be a guarantor. If I do, I just smile and say that my employer has rules that prevent me from taking on financial obligations without their approval.  

This has so far worked for me. 

Debt Management 101- taking on only known and well understood debt obligations

Sunday, November 11th, 2007

The CNNMoney story of 9th September started like this.

“It seems surprising that Kurt and Vicki Oliver could lose their home to a bank foreclosure. They had great credit, long-term employment and excellent assets and income.”

This story is another one of the sad stories emanating from the subprime mess. However the Olivers do not appear to have been one of those borrowers who borrowed far more than they could ever afford, and took illogical risks.

As the CNNMoney opener states, the Olivers appear to be pretty stable and switched on people.  

Rather, these people seem to be one of those, who just did not read and understand the fine print of the agreements they were entering into. They entered into agreements, having no idea of the liabilities they were taking on. Now, sadly, they are paying the price. 

Sometimes, we see people at supermarkets, squeezing a loaf of bread, sniffing it and checking it from tip to toe, before buying it.  

Similarly, in fact, even more so, reading and understanding the documentation governing the financial obligation that we are taking on should be a must. But the financial dumps are littered with people who took this brokers word, that lawyer’s word, that lender’s word and regretted that day. 

A former boss of mine told me, “if anyone ever presents a deal to me, a deal that needed me make an immediate decision, my answer would always be NO. 

This makes a lot of sense. The same should apply for any documentation that we are asked to sign. We should ask for and get time to read and understand them, and if necessary get an independent trusted lawyer to vet them for us.

If we are asked to sign on the spot and no time is given for us to study the documents, we should just walk away. That’s it. Period. 

No financial institution or intermediary is there for purposes of charity. Their purpose, maybe, their sole purpose, is to make as much as they possibly can from us. Their lawyers (though, usually paid by us), use their full arsenal to protect the banks, and guess who, is left unprotected and exposed. 

I should know. 

I read an ad for a fixed rate loan that offered me substantial savings should I refinance my mortgage. I applied, went through the process and finally got a letter of offer.  

The legal documentation that followed was something else. The agreement provided for the lender to increase rates anytime they wanted, decrease the term anytime they wanted, transfer the loan to someone else at their wish and my cost…..blah, blah, blah. 

Had I just signed the documents, which was what the lawyer wanted, I would have gotten myself an open ended obligation that appeared to have no limits.  

Whilst it is important to manage our debts well, it is even more important that we take on only well understood and accepted debts in the first place.   

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