If any homeowner, real estate professional, lawyer, or accountant is interested in more detailed information and truly analyzing these equity accelerator programs... below are some links and information that should shed a lot of light on this particular topic.
1) Jack M. Guttentag, Professor of Finance Emeritus and former Jacob Safra Professor of International Banking at the Wharton School of the University of Pennsylvania (one of the Worlds Best Graduate Finance programs) Earlier he was Chief of the Domestic Research Division of the Federal Reserve Bank of New York, on the senior staff of the National Bureau of Economic Research. Jack is also a Yahoo Finance Contributing Author.
Professor Guttentag states, “Based on everything I know, I have considerable confidence in my main conclusion, which is that the bulk of the reduction in interest payments comes from the borrower’s savings rather than from the program mechanism. … Neither the MMA nor any of its siblings provide the means for separating the contribution of the program to interest saving from the contribution made by the income the borrower allocates to principal reduction. The reason they don’t is that they want to pretend that it is the program that generates the benefit.”
Mr. Guttentag also provides a number of FREE spreadsheet and calculators to homeowners: http://www.mtgprofessor.com/spreadsheets.htm
2) Don Taylor, Ph.D., CFA, CFP, holds a Doctorate Degree in Finance and is an associate professor of finance at The American College, and writes the “Ask Dr. Don” column for Bankrate. He says the following, about even automatic type mortgage accelerators:
They are “Not for the financially indisciplined… Of course, all borrowers already have that money available with a conventional mortgage, too — and without the cost of refinancing. A borrower would simply need the financial discipline to use all that money as an additional principal payment. …Interest savings are still available the old-fashioned way by making additional principal payments on a conventional fixed-rate mortgage.”
3) Holden Lewis of Bankrate.com, agreeing with Dr. Don, also warns “Don’t pay ANY Money to a third party to help you set up a [equity accelerator] mortgage payment,” in Paying for biweekly mortgage program makes no sense:
4) Greg McBride, senior financial analyst for Bankrate.com, in the Miami Herald “McBride added that homeowners could better put their money to use in a Roth IRA or education funds, instead of funneling money into a mortgage accelerator.” Reff (Miami Herald 5/21/2007 Quick-pay mortgage system isn’t for all):
5) Federal Reserve Bank of Chicago Regarding the choice to pre-paying mortgage debt instead of contributing to Tax Deferred Accounts (TDA’s; IRA, 401K, etc…) the concluded the following:
“We document actual household behavior using data from the Survey of Consumer Finances, and conclude that about 38% of households who [currently] prepay their mortgages could benefit [more] from our proposed [tax] arbitrage strategy [of instead contributing to tax deferred retirement accounts].
Depending on the choice of the investment asset in the TDA, the median [NET] gain from such a reallocation ranges between 11 and 17 cents per dollar of savings mis-allocated [to mortgage pre-payment]”.
Finally, we show empirically that this inefficient [mortgage pre-payment] behavior is unlikely to be driven by liquidity or other constraints, and that self-reported debt aversion and risk aversion variables explain
to some extent the household preference for paying off their debt obligations early …]”
Translation = you may be able to save yourself More Money and take Less Risk, by simply contributing more to your retirement or other tax deferred accounts, instead of pre-paying your mortgage debt.
6) Carolyn Bond, CEO at the Consumer Action Law Centre in Melbourne, Australia. Anon-profit, funded by the Legal Aid Commission and the Government Consumers Affairs Office (Consumer Affairs Victoria):
In “Mortgage Accelerator Under Fire; Australian Securities and Investments Commission taking action against mortgage brokers” Carolyn Bond says,
“Consumer organizations such as ours, and our national financial services regulator - Australian Securities and Investments Commission (ASIC) - concluded years ago that there were no savings to be made, and that promoters were engaged in unlawful conduct. Examples and charts showing massive savings have all been shown to include significant increases in payments being made to the mortgage.”
As a follow-up Carolyn also points out: “I’ve seen it argued that these plans have a psychological impact; that borrowers are less likely to spend money if they know it’s coming out of their mortgage. We’ve seen that it can work in the opposite way. Some borrowers can’t stick to the plan, or don’t see the promised benefits, they then feel as if they have failed, or they realise they’ve got into something that is a con – and they feel they have much less financial control than they had originally.”
Here's their report on the various illegalities to the Australian Securities and Investment Comission (AISC):
"Mortgage Reduction - Misleading Marketing" http://www.consumeraction.org.au/downloads/DL59.pdf
Court finds major mortgage broker’s conduct misleading and deceptive:
ASIC obtains injunctions against loan calculator operator http://www.fido.gov.au/asic/asic.nsf/byheadline/07-95%20asic%20obtains%20injunctions%20against%20loan%20calculator%20operator
No credit for misleading loan calculators http://www.asic.gov.au/asic/asic.nsf/byheadline/04-300+No+credit+for+misleading+loan+calculators?openDocument
Debt reduction schemes: Guiding your client through the pitfalls http://www.consumeraction.org.au/downloads/DL98.pdf
7) Steve Sushner, a Real Estate, Estate Planning, and Housing Attorney writes, “I reviewed this product for the first time last week. Frankly I am disgusted by it. It does NOT save any money, it merely moves debt from one location to another and in fact will cost most clients more money than it will save them (even if there was no $3500 fee and even if we forget the tax implications). The debt on the ALOC is almost entirely ignored. Additionally the program fails drastically when you realize that most people are paid twice a month, not once and in arrears. Substantial savings is realized on this program by these two false presumptions.
I so dislike this program (and find it grossly unethical- I'm sure the class action lawsuit is around the corner)….”
8) Ben Stein (economist, writer, and funny guy) graduated from Columbia University with honors in economics. He graduated from Yale Law School as valedictorian of his class. He has worked as a poverty lawyer in New Haven and Washington, D.C., a trial lawyer at the Federal Trade Commission in Washington, D.C., a university and law professor at American University in Washington, D.C., at the University of California, and at Pepperdine University in Malibu, CA. At Pepperdine, Mr Stein has taught about securities law and ethical issues since 1986. Ben has written and published sixteen books, and nine nonfiction books about finance and ethical and social issue in finance…. plus most folks have probably seen him on TV.
In “When Paying Off Doesn’t Pay”, Mr. Stein writes “First, no one ever spent a sleepless night because she had millions in the bank and stocks but didn’t have her home paid off. On the other hand, if you pay off your mortgage and deprive yourself of liquidity, you could be in for some miserable times.
As I see it, if money is even the slightest bit tight, hold onto it and pay off the mortgage month by month. There’s nothing magically good about having a paid-off mortgage, but there’s something seriously bad about Not having ready liquid assets even if your home is paid for. …”
9) There are also many examples of other independent 3rd parties all over the internet, who have similar opinions and have been posting, blogging, etc… to help inform the public about the true facts behind these equity accelerators, and exposing the deceptive claims of magical savings without spending income or changing lifestyle.
http://activerain.com/blogsview/271562/Don-t-Drink-the equity accellerator coolaid
10) Robert Grauer, Ph.D., University of Miami: 2007-05-27 The Miami Herald:
“I was shocked to read the Money Merge Account article [in the Miami Herald]. I am not opposed to prepaying a mortgage, I’m only opposed to paying $3,500 for the privilege of doing so.
The identical savings used in the example could be achieved by paying an extra $582 each month [from someone’s discretionary income].
Is that simple fact worth $3,500?
Why would anyone purchase a program when there are multiple online mortgage calculators for free that tell you the same thing?”
11) Manuella Adrian: The Miami Herald:
“I must take exception with the Money Merge Account. The strategy and services it offers — doing certain financial calculations for the borrower for a sign-up fee of $3,500 — provides scant savings and may bring more financial difficulties in the future if borrowers are unsophisticated or undisciplined.
The borrower is much better off using the $3,500 for the MMA sign-up fee to make a one-time extra payment to the mortgage principal.
Borrowers can calculate their own potential cost savings from extra payments to principal by using free Internet based mortgage calculators.”
12) Clark Howard Nationally syndicated Consumer Advocate thinks merge accounts
Clark says mortgage Accelerators, "stink like rotting fish"
check out the discussions on his website and listen to his archived broadcasts at clarkhoward.com
--- here is a discussion thread and some very good analysis and great comments by poster JimB:
13) Dave Ramsey another nationally syndicated consumer advocate says:
"Don’t buy the hype! ... Stay away from equity accelerator mortgages." http://www.daveramsey.com/etc/realestatecenter/index.cfm?FuseAction=dspContent&intContentID=8513
"I hate that they are selling the "magic pill" idea, which doesn’t exist. Do it yourself."
"There is no magic software... It's a total Lie"
click here to listen to the show clip money_merge_account.mp3
14) The respected magazine ‘Business Week’ http://www.businessweek.com/ recently stated in regards to paying for equity acceleration schemas like bi-weekly payment or merge accounts, that “ The Rub [is] “You can accomplish the same thing yourself [for free]” “ quoting from Carolyn Warren’s Book ‘Mortgage Rip-Offs and Money Savers’.
16) Here's a great article from The Age in Melbourne Austrailia titled "Smoke and Mirrors" whoch explains the problems and related illegalities of these 'equity accellerator' / 'merge account' Down Under.
"The way these loans are marketed is deceptive and misleading. It is a total scam. If [they] were honest about what these products do, no one would buy them. There would be no reason for anyone to be in one of these loans."
" Bond found that many mortgage reduction services rely on false marketing, including making bigger repayments to line-of-credit loans than the standard variable loans in the calculations so that the savings look significant."
" The only way to significantly reduce your home loan is to make extra repayments or larger payments."
Broker may compensate victims
A court ruling has found it misled borrowers on debt reduction schemes. Sample and Partners, a mortgage broker exposed by Money for charging borrowers thousands of dollars in fees for a mortgage reduction scheme involving high-interest line-of-credit loans, may have to compensate borrowers following a court action. But the NSW Consumer Credit Legal Centre's principal solicitor, Katherine Lane, says the mortgage broker should have been fined so a compensation fund could be established for ...
Sydney Morning Herald 20/06/2007
17) Here's a great link to Scam.com with some very inciteful comments...
18) Ric Edelman on CNBC , whom In 2007, Barron’s rated as the No. 2 independent financial advisor in the nation has been providing financial advice to consumers for over 20 years. He is the best selling author of six books including: The Truth About Money; Ordinary People, Extraordinary Wealth; and his latest, The Lies About Money.
He hosts The Ric Edelman Show broadcast nationally via the ABC Radio Networks, and writes a syndicated newspaper advice column for United Media.
In 2007, Barron’s rated Ric as the No. 2 independent financial advisor in the nation and Research Magazine inducted him into its Financial Advisor Hall of Fame in 2004. Ric’s investment advisory firm, Edelman Financial Services LLC, manages over $3.6 billion for consumers nationwide, and is winner of more than 60 awards.
Q: Question: I've invested/became a member of the United First Financial Money Merge Account program. This program is designed to pay your mortgage off in more timely/faster. My question is, are you familiar with this program? If so, do you recommend it? --Dennis, Wyncote, PA
Rick's Answer: "Yes" [ he is familiar with it] and "NO" [he does nto recommend it]! http://www.cnbc.com/id/23274475
here's his new book: http://www.ricedelman.com/cs/the_lies_about_money/description
19) MSNBC has some opinion and good advice about 'mortgage accelerators'
"Here’s the problem: you almost certainly can do the same thing yourself — for free. "
20) US Federal Trade Comission Information about debt consolidation and credit counseling.
Be wary of credit counseling organizations that:
- charge high up-front or monthly fees for enrolling in credit counseling or a DMP.
- pressure you to make “voluntary contributions,” another name for fees.
- won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.
- try to enroll you in a DMP without spending time reviewing your financial situation.
- offer to enroll you in a DMP without teaching you budgeting and money management skills.
- demand that you make payments into a DMP before your creditors have accepted you into the program.
21) General Info
Report Concerns about Financial Crimes