Friday, January 6, 2012

Banks are Evil: Special "Citibank Must Die a Thousand Deaths, Its Wives and Children Scattered to the Corners of the Earth, Its Orchards Burned and Its Fields Plowed with Salt" Edition

... or Return of the Float.

Back in the old days, banks needed a float for check deposits. The float was the time it took your bank to process your check, send it to another bank, and actually get the cash (OK, a wire) to post to your account. If memory serves, local checks typically took three days, and out-of-state took five.

This meant that the banks ended up with several days where they got the use of your money for free.

Technology improved, check clearing went digital and now the float has been reduced to about a day.

But getting money for free is something banks really, really like, and Citibank came up with an ingenious way to do it in the mortgage field. As Felix Salmon reports:
Most salaried Americans ... get paid every two weeks. Which means, to all intents and purposes, that you need to be able to make one mortgage payments out of every two paychecks.
And that in turn raises an intriguing possibility: if you take half of your mortgage payment out of every paycheck, you’re going to end up making 13 mortgage payments a year. Which will pay down your mortgage faster, and could save you thousands of dollars
Enter the ever-helpful Citibank, with a product which does just that. It’s called The BiWeekly Advantage Plan®, and it’s essentially an automated mortgage payment, of half your monthly mortgage payment, which comes out of your account every two weeks. Easy.
Except that:
 Payments are remitted to your mortgage company monthly.
As Felix notes:
The payments are made in arrears, of course. You make your half-payment, and then wait two weeks, and you make your second half-payment, and then the two are bundled up and sent off to the mortgage company (which in nearly all cases is CitiMortgage itself) as a single monthly payment.
Which means that for roughly half the year, Citibank is sitting on an amount of money equal to half your mortgage payment. That money has left your account: it’s not yours any more, and Citi can do with it as it pleases. And Citi gets the float from all that money until it gets around to sending it off to pay off the mortgage.
Basically, Citi is getting a big advantage from you making half your mortgage payment two weeks early.
It gets better. Citibank actually charges you to lend them money for free.
There is a one-time non-refundable enrollment fee of $375 and a transaction fee of $1.50 for each draft [or $39 a year]. 
Pure friggin' evil. It's their best idea since:

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