E*Trade and Bank of America Get What’s Coming to Them for Offering Exotic Mortgages

November 19, 2007 By Matthew Paulson

For the last five years or so, many of the nation’s major banks and financial institutions have been originating all sorts of non-traditional mortgages such as interest only loans, adjustable rate mortgages, mortgages with balloons, fifty year mortgages, and a whole slew of other financial products that no consumer should ever buy. Unsurprisingly, many consumers could not continue to afford their mortgages as they adjusted upward and the home-buying market is very weak right now, leading to all sorts of delinquencies and foreclosures and now it’s starting to catch up with Bank of America and E*Trade.

All sorts of rumors are flying about a potential bankruptcy over at E*Trade. Said rumors actually dropped their stock price by 60% after the news hit. After news of a potential buyout or takeover hit, it rebounded slightly. Unfortunately there are 60,000 individuals who will be out of luck if E*Trade were to file bankruptcy. These people have more than $100,000 invested into FDIC insured accounts through E*Trade and would be out of a lot of money if the company were to go bankrupt. If you fit into this category, drop your savings inside of E*Trade to less than $100,000, that way you won’t lose your money if the bank goes under.

The exotic mortgages that Bank of America were giving out are starting to catch up with them as well. The financial institution had to provide $600 million dollars to avoid having the share-price of their money market funds dip below $1.00. Traditionally money markets are designed to keep at exactly a price of $1.00 per share, and it’s considered very bad if the price ever drops below that. Bank of America had used money from their investors in money market funds and invested that money by loaning it out to people in all sorts of exotic mortgages. When the real estate market collapsed in on itself, the price was dangerously close to “breaking the buck.” BOA did the smart thing to replenish its money market fund, because if the share price had dropped below $1.00, most investors most likely would have taken their money elsewhere.

Banks made a major mistake by offering mortgages to people who cannot afford to pay them back. One of the major financial magazine’s covers this week features a number of major bank presidents and the headline, “What Were They Smoking?” in regards to the sub-prime mortgage mess. Chances are we will see other banks hit hard times because of woes in the real estate market. Make sure that your money is at a solid and performing bank and that you do not have more than $100,000 at any particular financial institution.

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