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Mortgage Almanac Book Review:
Your Bank Is Ripping You Off
by Edward F. Mrkvicka
St. Martin's Griffin, New York
$12.95, 201 Pages
Reviewed by Stephanie A. Chisholm
Twenty years ago, most consumers did all their banking at one of their local banks. Checking and savings accounts, mortgages, car financing and personal loans all came from the same local banks and the likelihood of loan approvals seemed better because of the full-service relationship. Today, consumers often use a different institution for each financial service they choose.
A basic pass book or checking account might be at the local bank, but many savers have moved their savings to brokerage accounts that offer higher interest rates on uninvested deposits. Car loans often come from an auto loan financing subsidiary, and credit card offers come in volumes of direct marketing pieces from lenders all over the country. Mortgage borrowers can now choose from dozens of mortgage bankers, brokers and even on-line lenders for their home loan.
Competition has finally come to the financial services sector. But while rates and fees have dropped during this process, many of the old oligopolistic tendencies of the banking industry continue to cost consumers. It is in this context that Edward Mrkvicka has written his latest attack on the banking industry, Your Bank is Ripping You Off.
The author has a serious chip on his shoulder about banks and bankers, despite the fact that he was Chairman and CEO of a bank. Your Bank is Ripping You Off leaves no doubt as to the author's perspective. Mr. Mrkvicka has written numerous books about consumer banking, including The Bank Book and Battle Your Bank-And Win.
The majority of Your Bank is Ripping You Off is devoted to detailing the intricacies of consumer banking, and how bankers make loads of extra profits from small areas that most consumers either do not know or care about.
In his chapter on unsecured consumer loans, Mr. Mrkvicka analyzes two sample financial statements and shows how one borrower looks better to the bank. He calculates financial ratios and shows how a banker looks at each part of a borrower's finances. In a spirit of candor found throughout the book, the author writes, "A person should be able to tell the unvarnished truth and receive fair consideration from a bank. My experience shows that's not the case."
In his chapter on mortgages, Mr. Mrkvicka covers the usual target areas found in many mortgage books such as rate-shopping, closing costs and escrow accounts. He offers not only suggestions for savings but also specific, understandable explanations as to how banks take advantage of borrowers in each area.
Most interesting in the mortgage chapter was the author's detailed instructions on how to buy a home with no mortgage expense after 30 years. His strategy is to first make a small additional principal payment each month to shorten the loan term from 30 to about 22 years. Borrowers should then continue to make their regular mortgage payment when the loan is paid off to their own savings account for the remaining eight years. Finally, borrowers should purchase a grade A tax free municipal bond with the same term as their loan when they buy their house. Mr. Mrkvicka proves clearly that these three strategies combined to truly make the mortgage cost nothing. Of course, most home buyers do not have the money to buy a bond at the time they are scraping up a down payment and closing costs.
With eye-catching topics such as "Your safe-deposit box is not so safe," and "You can't trust the trust department," Mr. Mrkvicka has made every effort to give consumers a wake-up call about the financial services they select. In addition to getting ripped off by price gouging and hidden fees, Mr. Mrkvicka also warns consumers that incompetency can cost dearly as well. For example, in the section on bank trust departments he bluntly writes: "Based on experience, I can say without hesitation that most community banks have trust departments whose staff are professionally unqualified."
Mr. Mrkvicka goes a little too far in some areas, such as when he hints that banks created 30 year loans so that borrowers would pay more interest. In fairness to lenders, a 30 year mortgage was not invented for lenders but for home buyers. Until the 1940's, loan terms of more than 10 years were rare, and lenders were in fact cautious about lending for too long a period even if it meant extra interest. Longer terms were encouraged by the federal government through the FHA program to promote more affordable home ownership. On the other side of the coin, 100 year loan terms are common in Japan, but only because land prices are so astronomical that in some cases it is the only way to afford a home.
Consumers who feel that their financial institution is taking advantage of them but are unsure how will find Your Bank is Ripping You Off a road map to savings.